Risk, Uncertainty and Exchange Rates
61 Pages Posted: 6 Apr 2007 Last revised: 22 Aug 2022
Date Written: November 1987
Abstract
This paper explores a new direction for empirical models of exchange rate determination. The motivation arises from two well documented facts, the failure of log-linear empirical exchange rate models of the 1970's and the variability of risk premiums in the forward market. Rational maximizing models of economic behavior imply that changes in the conditional variances of exogenous processes, such as future monetary policies, future government spending, and future rates of income growth, can have a significant effect on risk premiums in the foreign exchange market and can induce conditional volatility of spot exchange rates. I examine theoretically how changes in these exogenous conditional variances affect the level of the current exchange rate, and I attempt to quantify the extent that this channel explains exchange rate volatility using autoregressive conditional heteroscedastic models.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Covariation of Risk Premiums and Expected Future Spot Exchange Rates
-
The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets
-
Are Exchange Rates Excessively Variable?
By Jeffrey A. Frankel and Richard Meese
-
International Lending and Borrowing in a Stochastic Sequence Equilibrium
-
Recent Estimates of Time-Variation in the Conditional Variance and in the Exchange Risk Premium
-
Exchange Rate Volatility and its Impact on the Transaction Costs of Covered Interest Rate Parity
By Ramaprasad Bhar, Toan M. Pham, ...
-
An International Economy with Country-Specific Money and Productivity Growth Processes
-
Foreign Exchange Market Efficiency, Speculators, Arbitrageurs and International Capital Flows
By Tin Nguyen