State-Uncertainty preferences and the Risk Premium in the Exchange rate market
AbstractThis paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: “macroeconomic risk” and “the risk associated with variation in the private agents’ perception on the level of uncertainty”. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model
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Bibliographic InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0917.
Length: 25 pages
Date of creation: 2009
Date of revision:
Risk premium; taste shocks; fundamental uncertainty.;
Other versions of this item:
- Jiménez-Martín, Juan-Ángel & Cinca, Alfonso Novales, 2010. "State-uncertainty preferences and the risk premium in the exchange rate market," Economic Modelling, Elsevier, vol. 27(5), pages 1043-1053, September.
- Juan-Angel Jimenez-Martin & Alfonso Novales Cinca, 2009. "State-Uncertainty preferences and the Risk Premium in the Exchange rate market," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 0908, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-05-23 (All new papers)
- NEP-IFN-2009-05-23 (International Finance)
- NEP-UPT-2009-05-23 (Utility Models & Prospect Theory)
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