The Risk Premium in the Foreign Exchange Market
This paper presents a dynamic, optimizing model of the risk premium in the forward foreign exchange market. Agents face random endowments and money growth rates. Complete insurance markets do not exist and foreign exchange is held to hedge against risk. In some examples with log-linear preferences, the size of the risk premium in the forward market is related to the variability of output and money growth. An interesting conclusion of the model is that for plausible examples, the convexity component of the nominal risk premium (due to Siegel's paradox) may be quite large relative to the total risk premium. Copyright 1989 by Ohio State University Press.
Volume (Year): 21 (1989)
Issue (Month): 1 (February)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879|
When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:21:y:1989:i:1:p:49-65. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.