Forward Speculation, Excess Returns, and Exchange Rate Variability: The Role of Risk Premiums
The paper reconsiders the unbiasedness hypothesis in the foreign exchange market. Within the context of a conventional model of exchange rates, risk premium shocks are constrained to have no permanent effects on the spot rate. Using monthly data from the post-floating period, the paper estimates risk premiums for the dollar rates of the yen, mark, and pound. Risk premium innovations seem to explain a modest proportion of short-term variability of exchange rate changes and excess returns. However, risk premiums may explain serial correlations in excess returns. Copyright 1998 by Blackwell Publishing Ltd.
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Volume (Year): 6 (1998)
Issue (Month): 3 (August)
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