State-Uncertainty preferences and the Risk Premium in the Exchange rate market

Juan Angel Jimenez Martin () and Alfonso Novales ()

Documentos del Instituto Complutense de Análisis Económico from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales

Abstract: This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: “macroeconomic risk” and “the risk associated with variation in the private agents’ perception on the level of uncertainty”. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model

New Economics Papers: this item is included in nep-ifn and nep-upt
Date: Written

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Related works:
Working Paper: State-Uncertainty preferences and the Risk Premium in the Exchange rate market (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:ucm:doicae:0908

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