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Properties of foreign exchange risk premiums
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Sarno, Lucio, Schneider, Paul and Wagner, Christian. (2012) Properties of foreign exchange risk premiums. Journal of Financial Economics, Vol.105 (No.2). pp. 279-310. ISSN 0304-405X
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Official URL: http://dx.doi.org/10.1016/j.jfineco.2012.01.005
Abstract
We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals.
| Item Type: | Journal Article |
|---|---|
| Subjects: | H Social Sciences > HF Commerce |
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
| Journal or Publication Title: | Journal of Financial Economics |
| Publisher: | Elsevier Science BV |
| ISSN: | 0304-405X |
| Date: | August 2012 |
| Volume: | Vol.105 |
| Number: | No.2 |
| Page Range: | pp. 279-310 |
| Identification Number: | 10.1016/j.jfineco.2012.01.005 |
| Status: | Peer Reviewed |
| Publication Status: | Published |
| Access rights to Published version: | Restricted or Subscription Access |
| URI: | http://wrap.warwick.ac.uk/id/eprint/44868 |
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