Article (Scientific journals)
The missing risk premium in exchange rates
Penasse, Julien
2022In Journal of Financial Economics, 143 (2), p. 697-715
Peer reviewed
 

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Abstract :
[en] We use a present-value model of the real exchange rate to impose structure on the currency risk premium. We allow the currency risk premium to depend on both the interest rate differential and a latent component: the missing risk premium. Consistent with the data, our present-value model implies that the real exchange rate should predict currency returns. We find that the missing risk premium, not the interest rate differential, explains most of the variation in the real exchange rate. Moreover, our model sheds light on puzzling relations between the interest rate differential, the real exchange rate, and the currency risk premium.
Disciplines :
Finance
Author, co-author :
Penasse, Julien  ;  University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Finance (DF)
External co-authors :
yes
Language :
English
Title :
The missing risk premium in exchange rates
Publication date :
February 2022
Journal title :
Journal of Financial Economics
Volume :
143
Issue :
2
Pages :
697-715
Peer reviewed :
Peer reviewed
Available on ORBilu :
since 10 October 2022

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