Reference : The missing risk premium in exchange rates
Scientific journals : Article
Business & economic sciences : Finance
The missing risk premium in exchange rates
Penasse, Julien mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Finance (DF) >]
Journal of Financial Economics
[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.

File(s) associated to this reference

Fulltext file(s):

Open access
PDF1.pdfPublisher postprint980.74 kBView/Open

Bookmark and Share SFX Query

All documents in ORBilu are protected by a user license.