A New Representation for the Foreign Currency Risk Premium
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.
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- van Bergeijk, Peter A. G. & Berk, Jan Marc, 2000. "Is the yield curve a useful Information variable for the Eurosystem?," Working Paper Series 0011, European Central Bank.
- Bansal, Ravi & Dahlquist, Magnus, 2000.
"The forward premium puzzle: different tales from developed and emerging economies,"
Journal of International Economics,
Elsevier, vol. 51(1), pages 115-144, June.
- Bansal, Ravi & Dahlquist, Magnus, 1999. "The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies," CEPR Discussion Papers 2169, C.E.P.R. Discussion Papers.
- 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.
- Bansal, Ravi, 1997. "An Exploration of the Forward Premium Puzzle in Currency Markets," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 369-403.
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