Exchange Rate Systems and Investor Preferences

Michael Melvin and Michael B Ormiston

Economic Inquiry, 1991, vol. 29, issue 3, 446-57

Abstract: This paper investigates whether or not floating exchange rates add an undesirable level of risk to international investment positions. For investors holding currencies, the authors find that fixed exchange rates are preferred to floating exchange rates, which supports the often-argued case that floating exchange rates do excessively increase the riskiness of investment. However, in the more realistic case of investors holding foreign securities, they find that floating exchange rates are preferred to fixed exchange rates; that is, the authors find that floating exchange rates have not added an undesirable level of risk to international investment positions. Copyright 1991 by Oxford University Press.

Date: 1991
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