IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective

  • Geert Bekaert

This paper investigates the statistical properties of high frequency nominal exchange rates and forward premiums in the context of a dynamic two-country general equilibrium model. Primary focus is on the persistence, variability, leptokurtosis and conditional heteroskedasticity of exchange rates and on the behavior of foreign exchange risk premiums. The model combines temporal dependencies in preferences with a transaction cost technology that generates a role for money. Agents in the economy make decisions on a weekly frequency and face shocks which display time-varying uncertainty. Simulations reveal that the model accounts for the statistical properties of exchange rate data much more accurately than previous structural models.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w4818.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4818.

as
in new window

Length:
Date of creation: Aug 1994
Date of revision:
Publication status: published as Review of Financial Studies, Vol. 9, no. 2 (Summer 1996): 427-470.
Handle: RePEc:nbr:nberwo:4818
Note: AP
Contact details of provider: Postal:
National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
  2. David K. Backus & Allan W. Gregory & Chris I. Telmer, 1992. "Accounting for Forward Rates in Markets for Foreign Currency," Working Papers 92-18b, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
  4. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
  5. Palm, F.C. & Nijman, T.E., 1990. "Parameter identification in ARMA-processes in the presence of regular but incomplete sampling," Other publications TiSEM 69e84dde-44ef-4592-93a8-8, Tilburg University, School of Economics and Management.
  6. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  7. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  8. 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.
  9. Drost, F.C. & Nijman, T.E., 1990. "Temporal aggregation of GARCH processes," Discussion Paper 1990-66, Tilburg University, Center for Economic Research.
  10. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  11. Hansen, Lars Peter & Sargent, Thomas J, 1983. "The Dimensionality of the Aliasing Problem in Models with Rational Spectral Densities," Econometrica, Econometric Society, vol. 51(2), pages 377-87, March.
  12. Bekaert, G.R.J. & Hodrick, R. & Marshall, D., 1997. "The implications of first-order risk aversion for asset market risk premiums," Discussion Paper 1997-07, Tilburg University, Center for Economic Research.
  13. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
  14. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
  15. Drost, F.C. & Nijman, T.E., 1993. "Temporal aggregation of GARCH processes," Other publications TiSEM 0642fb61-c7f4-4281-b484-4, Tilburg University, School of Economics and Management.
  16. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
  17. Francis X. Diebold, 1986. "Temporal aggregation of ARCH processes and the distribution of asset returns," Special Studies Papers 200, Board of Governors of the Federal Reserve System (U.S.).
  18. Abel, Andrew B., 1988. "Stock prices under time-varying dividend risk : An exact solution in an infinite-horizon general equilibrium model," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 375-393.
  19. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers 0089, National Bureau of Economic Research, Inc.
  20. Canova, Fabio & Marrinan, Jane, 1993. "Profits, risk, and uncertainty in foreign exchange markets," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 259-286, November.
  21. Marshall, David A, 1992. " Inflation and Asset Returns in a Monetary Economy," Journal of Finance, American Finance Association, vol. 47(4), pages 1315-42, September.
  22. Martin S. Eichenbaum & Lars Peter Hansen, 1987. "Estimating Models with Intertemporal Substitution Using Aggregate Time Series Data," NBER Working Papers 2181, National Bureau of Economic Research, Inc.
  23. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  24. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
  25. Dunn, Kenneth B. & Singleton, Kenneth J., 1986. "Modeling the term structure of interest rates under non-separable utility and durability of goods," Journal of Financial Economics, Elsevier, vol. 17(1), pages 27-55, September.
  26. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4818. 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: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.