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Exchange Rate Expectations and the Risk Premium: Tests for a Cross Section of 17 Currencies

  • Frankel, Jeffrey A
  • Chinn, Menzie D

Survey data on a broad cross section of 17 currencies are used to determine whether the forward discount moves primarily in response to changes in expectations of depreciation, or in the risk premium. We find that, in contrast to earlier studies involving developed country exchange rates, variation in the risk premium is a quantitatively significant factor in movements of the forward discount. However, changes in expectations also have a substantial effect. Copyright 1993 by Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 1 (1993)
Issue (Month): 2 (June)
Pages: 136-44

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Handle: RePEc:bla:reviec:v:1:y:1993:i:2:p:136-44
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  1. Dokko, Yoon & Edelstein, Robert H, 1989. "How Well Do Economists Forecast Stock Market Prices? A Study of the Livingston Surveys," American Economic Review, American Economic Association, vol. 79(4), pages 865-71, September.
  2. Fischer, Andreas M, 1989. "Unit Roots and Survey Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(4), pages 451-63, November.
  3. Robert J. Hodrick & Sanjay Srivastava, 1983. "An Investigation of Risk and Return in Forward Foreign Exchange," NBER Working Papers 1180, National Bureau of Economic Research, Inc.
  4. Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc.
  5. A. Steven Englander & Gary Stone, 1989. "Inflation expectations surveys as predictors of inflation and behavior in financial and labor markets," Research Paper 8918, Federal Reserve Bank of New York.
  6. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March.
  7. Ito, Takatoshi, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," American Economic Review, American Economic Association, vol. 80(3), pages 434-49, June.
  8. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  9. Froot, Kenneth A & Frankel, Jeffrey A, 1989. "Forward Discount Bias: Is It an Exchange Risk Premium?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 139-61, February.
  10. A. Steven Englander & Gary Stone, 1989. "Inflation expectations surveys as predictors of inflation and behavior in financial and labor markets," Quarterly Review, Federal Reserve Bank of New York, issue Aut, pages 20-32.
  11. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  12. Jeffrey Frankel and Kenneth Froot., 1991. "Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market," Economics Working Papers 91-158, University of California at Berkeley.
  13. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
  14. Baillie,Richard T. & McMahon,Patrick C., 1990. "The Foreign Exchange Market," Cambridge Books, Cambridge University Press, number 9780521396905.
  15. Kathryn M. Dominguez, 1986. "Are foreign exchange forecasts rational? New evidence from survey data," International Finance Discussion Papers 281, Board of Governors of the Federal Reserve System (U.S.).
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