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Risk Premium and Nominal Rigidities

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  • Seongman Moon

Abstract

This paper investigates implications of nominal rigidities for the risk premium. We use Obstfeld and Rogoff (1998) type DSGE model equipped with nominal rigidities, imperfect market competitions, a production sector, and a money-in-the-utility function. For a monthly frequency, we generate volatility relations derived from violations of unbiasedness in the forward exchange rate and the autocorrelation of the forward premium observed in the data. However, we fail to obtain the same results when the quarterly decision interval is considered mainly because of time varying uncertainty and the discount factor. We also find that real exchange risks and staggered nominal contracts play a role in the determination of the risk premium while habit persistence and asset market structure do not. Finally, our analysis shows that one should be cautious about measuring the risk premium from the regression of ex post predictable returns

Suggested Citation

  • Seongman Moon, 2004. "Risk Premium and Nominal Rigidities," Econometric Society 2004 Far Eastern Meetings 588, Econometric Society.
    • Handle: RePEc:ecm:feam04:588
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    More about this item

    Keywords

    Nominal rigidities; the risk premium; the forward premium; the expected depreciation; the volatility relations;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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