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Is it Risk? Explaining Deviations from Uncovered Interest Parity

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  • Robert E. Cumby

Abstract

This paper analyzes ex-ante returns to forward speculation and asks if these returns can be explained by models of a foreign exchange risk premium. After presenting evidence that both nominal and real expected speculative profits are non-zero, the paper examines if real returns to forward speculation are consistent with consumption-based models of risk premia. Estimates of the conditional covariance between real speculative returns and real consumption growth are presented and, like ex-ante returns to forward speculation, they exhibit statistically significant fluctuations over time and often change sign.

Suggested Citation

  • Robert E. Cumby, 1987. "Is it Risk? Explaining Deviations from Uncovered Interest Parity," NBER Working Papers 2380, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2380
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    References listed on IDEAS

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