Sarno, Lucio, Schneider, Paul, Wagner, Christian. 2012. Properties of Foreign Exchange Risk Premiums. Journal of Financial Economics. 105 (2), 279-310.
BibTeX
Abstract
We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals.
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Status of publication | Published |
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Affiliation | WU |
Type of publication | Journal article |
Journal | Journal of Financial Economics |
Citation Index | SSCI |
WU Journalrating 2009 | A+ |
Starjournal | Y |
Language | English |
Title | Properties of Foreign Exchange Risk Premiums |
Volume | 105 |
Number | 2 |
Year | 2012 |
Page from | 279 |
Page to | 310 |
Reviewed? | Y |
DOI | http://dx.doi.org/10.1016/j.jfineco.2012.01.005 |
Open Access | N |
Associations
- People
- Wagner, Christian (Details)
- External
- Sarno, Lucio (Cass Business School, City University London, United Kingdom)
- Schneider, Paul (Warwick Business School, University of Warwick, United Kingdom)
- Organization
- Institute for Finance, Banking and Insurance IN (Details)