Covered Purchasing Power Parity, Ex-ante PPP and Risk Aversion
The standard expectations augmented theory of ex-ante Purchasing Power Parity which was first developed by Roll assumes that agents are risk neutral. A Covered Purchasing Power Condition is developed which holds for the general case of risk aversion. A risk augmented form of ex-ante PPP is then derived using a consumption-based asset pricing framework. This is tested for the post-Bretton woods period for the group of seven main industrial countries. The results suggest that risk aversion has a part to play in explaining deviations from PPP. Copyright Blackwell Publishers Ltd 1997.
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Volume (Year): 24 (1997-04)
Issue (Month): 3 ()
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