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Forward Speculation, Excess Returns, and Exchange Rate Variability: The Role of Risk Premiums

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  • Dibooglu, Selahattin

Abstract

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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  • Dibooglu, Selahattin, 1998. "Forward Speculation, Excess Returns, and Exchange Rate Variability: The Role of Risk Premiums," Review of International Economics, Wiley Blackwell, vol. 6(3), pages 427-440, August.
    • Handle: RePEc:bla:reviec:v:6:y:1998:i:3:p:427-40
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    Cited by:

    1. Nath, Golaka, 2013. "The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis," MPRA Paper 51591, University Library of Munich, Germany.

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