Do foreign exchange risk premiums relate to the volatility in the foreign exchange and equity markets?
Empirical tests are performed to examine whether foreign exchange excess returns for the British pound, Canadian dollar, Deutsche mark, and Japanese yen are related to volatility in the currency market and volatility in the stock markets. Our results indicate that volatility (measured by standard deviation and variance) from currency markets is significant in explaining the excess returns, suggesting that the excess returns are indeed reward for risk-taking. In addition, shocks in equity markets are found to have a significant impact on currency risk premium as well. In some cases, we find nonlinearity in the risk premium. Finally, our results emerged from Glosten, Jagannathan, Runkle's model (Journal of Finance,48 (5), 1993) suggest that risk premiums for each currency tend to respond to positive and negative shocks differently.
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Volume (Year): 10 (2000)
Issue (Month): 1 ()
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