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A New Representation for the Foreign Currency Risk Premium

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  • Bernardino Adão
  • Maria de Fátima Silva

Abstract

We provide new representations for the risk premium and expected exchange rate change. According to our representations they are a function of the term premium. In particular, we obtain that investors require higher interest rates on currencies expected to fall if the term premium is expected to stay constant. Moreover, our representation are such that the risk premium is very volatile and negatively correlated with the expected depreciation rate.

Suggested Citation

  • Bernardino Adão & Maria de Fátima Silva, 2001. "A New Representation for the Foreign Currency Risk Premium," Working Papers w200103, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w200103
    as

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    References listed on IDEAS

    as
    1. 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.
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    3. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
    4. van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 11, European Central Bank.
    5. Bansal, Ravi, 1997. "An Exploration of the Forward Premium Puzzle in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 369-403.
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