Covered Purchasing Power Parity, Ex‐ante PPP and Risk Aversion

Michael Moore

Journal of Business Finance & Accounting, 1997, vol. 24, issue 3, 397-412

Abstract: The standard expectations augmented theory of ex‐ante Purchasing Power Parity which was first developed by Roll assumes that agents are risk neutral. A Covered Purchasing Power Condition is developed which holds for the general case of risk aversion. A risk augmented form of ex‐ante PPP is then derived using a consumption‐based asset pricing framework. This is tested for the post‐Bretton woods period for the group of seven main industrial countries. The results suggest that risk aversion has a part to play in explaining deviations from PPP.

Date: 1997
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https://doi.org/10.1111/1468-5957.00111

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Working Paper: Covered Purchasing Power Parity, Ex-Ante PPP and Risk Aversion (1992)
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