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The pricing of forward exchange rates

  • Levine, Ross

This paper addresses the question: do risk premia account for the observed time-varying discrepancies between forward and corresponding future spot exchange rates? A simple theoretical framework is used to derive testable restrictions on the parameters of a multivariate regression model. Using various econometric procedures and different estimation periods, the data reject the restrictions. In contrast to past investigations, the empirical results are inconsistent with a world in which time-varying risk premia are the sole determinants of observed deviations from the unbiased expectations hypothesis. Anticipated real exchange rate movements may explain the rejection.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 8 (1989)
Issue (Month): 2 (June)
Pages: 163-179

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Handle: RePEc:eee:jimfin:v:8:y:1989:i:2:p:163-179
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  17. Michael R. Darby, 1983. "Movements in Purchasing Power Parity: The Short and Long Runs," NBER Chapters, in: The International Transmission of Inflation, pages 462-477 National Bureau of Economic Research, Inc.
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  19. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
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