Effect of net foreign assets on persistency of time-varying risk premium: Evidence from the Dollar-Yen exchange rate

Makoto Shimizu

International Review of Economics & Finance, 2017, vol. 49, issue C, 255-265

Abstract: In this paper, I focus on the time-varying and persistent exchange rate risk premiums in uncovered interest rate parity associated with changes in net foreign assets. The results of my analyses of the Dollar-Yen exchange rate provide evidence consistent with my risk premium formulation and the predictability of current account balances. I contend that the strong persistent effect causes nominal exchange rates to appear non-stationary in level. I also argue that the present value model of the level of exchange rates combined with the AR(1) approximation for interest rate differentials can reconcile a failure of uncovered interest rate parity.

Keywords: Uncovered interest rate parity; Time-varying risk premium; Nominal exchange rate stationarity; Current account balance (search for similar items in EconPapers)
JEL-codes: F31 F32 F47 G12 G15 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:49:y:2017:i:c:p:255-265

DOI: 10.1016/j.iref.2017.01.022

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