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A New Representation for the Foreign Currency Risk Premium

Authors 
Maria de Fátima Silva
Publication Year 
2001
JEL Code 
F30 - General
F31 - Foreign Exchange
G11 - Portfolio Choice
G12 - Asset Pricing
Abstract 
We provide new representations for the risk premium and expected exchange rate change. According to our representations they are a function of the term premium. In particular, we obtain that investors require higher interest rates on currencies expected to fall if the term premium is expected to stay constant. Moreover, our representation are such that the risk premium is very volatile and negatively correlated with the expected depreciation rate.
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