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The Foreign Exchange Risk Premium: Is It Real?

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  • Hakkio, Craig S
  • Sibert, Anne

Abstract

This paper presents a numerical analysis of an optimizing, equilibrium model of the risk premium in the forward foreign exchange market. An overlapping-generations model with incomplete markets is employed. Because the equilibria are analytically intractable, the model must be solved numerically. The authors show how changes in the distribution of the exogenous variables affect the distribution of the risk premium. They find that the properties of the real risk premium have far more intuitive appeal than those of the more commonly employed nominal risk premium. Copyright 1995 by Ohio State University Press.

Suggested Citation

  • Hakkio, Craig S & Sibert, Anne, 1995. "The Foreign Exchange Risk Premium: Is It Real?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 301-317, May.
  • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:2:p:301-17
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    Citations

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    Cited by:

    1. Choudhry, Taufiq, 1999. "Re-examining forward market efficiency Evidence from fractional and Harris-Inder cointegration tests," International Review of Economics & Finance, Elsevier, vol. 8(4), pages 433-453, November.
    2. Battermann, Harald L & Broll, Udo, 2001. "Inflation Risk, Hedging, and Exports," Review of Development Economics, Wiley Blackwell, vol. 5(3), pages 355-362, October.
    3. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    4. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.
    5. Leduc, Sylvain, 2002. "Incomplete markets, borrowing constraints, and the foreign exchange risk premium," Journal of International Money and Finance, Elsevier, vol. 21(7), pages 957-980, December.
    6. Guillermo Benavides Perales, 2016. "Exchange Rate Risk Premium: An Analysis of its Determinants for the Mexican Peso-USD," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 11(1), pages 55-77, Enero-Jun.
    7. Sibert, Anne & Ha, Jiming, 1997. "Portfolio substitution and exchange rate volatility," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 517-534, August.
    8. Ioannis N. Kallianiotis, 2016. "Factors Affecting the Exchange Rate Risk Premium," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(6), pages 1-3.
    9. Benavides Guillermo, 2016. "Exchange Rate Risk Premium: An Analysis of its Determinants for the Mexican Peso-USD," Working Papers 2016-11, Banco de México.
    10. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
    11. Guillermo Benavides Perales, 2016. "Exchange Rate Risk Premium: An Analysis of its Determinants for the Mexican Peso-USD," Remef - The Mexican Journal of Economics and Finance, Instituto Mexicano de Ejecutivos de Finanzas. Remef, February.

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