On Time-Series Properties of Time-Varying Risk Premium in the Yen/Dollar Exchange Market

32 Pages Posted: 19 Jun 2004 Last revised: 29 Oct 2022

See all articles by Fabio Canova

Fabio Canova

BI Norwegian Business School

Takatoshi Ito

University of Tokyo - Faculty of Economics; National Bureau of Economic Research (NBER); Ministry of Finance, Tokyo

Date Written: August 1988

Abstract

The purpose of this paper is to characterize the changes in risk premium in the 1980s. A five-variable vector autoregressive model (VAR) is constructed to calculate a risk premium series in the foreign exchange market. The risk premium series is volatile and time-varying. The hypothesis of no risk premium is strongly rejected for the entire sample and each of the two subsamples considered. Various tests using the constructed risk premium series suggest that a risk premium existed but it was neither constant nor stable over subsamples and that its volatility was considerably reduced after October 1982.

Suggested Citation

Canova, Fabio and Ito, Takatoshi, On Time-Series Properties of Time-Varying Risk Premium in the Yen/Dollar Exchange Market (August 1988). NBER Working Paper No. w2678, Available at SSRN: https://ssrn.com/abstract=439598

Fabio Canova (Contact Author)

BI Norwegian Business School ( email )

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Takatoshi Ito

University of Tokyo - Faculty of Economics ( email )

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