Recent Estimates of Time-Variation in the Conditional Variance and in the Exchange Risk Premium

22 Pages Posted: 6 Apr 2007 Last revised: 22 Dec 2022

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: August 1987

Abstract

The optimal-diversification model of investors' portfolio behavior can give a linear relationship between the exchange risk premium and the conditional exchange rate variance. This note surveys recent empirical work that allows for the conditional variance itself, and therefore the risk premium, to vary over time. In particular, it examines the implications of recent empirical estimates for earlier arguments, based on the assumption that the conditional variance was constant over time, that the exchange risk premium had to be small in magnitude and variability.

Suggested Citation

Frankel, Jeffrey A., Recent Estimates of Time-Variation in the Conditional Variance and in the Exchange Risk Premium (August 1987). NBER Working Paper No. w2367, Available at SSRN: https://ssrn.com/abstract=977166

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