A DYMIMIC Model of Forward Foreign Exchange Risk, with Estimates for Three Major Exchange Rates

Mark Taylor

The Manchester School of Economic & Social Studies, 1988, vol. 56, issue 1, 55-68

Abstract: One explanation which has been proposed for the failure of the forward exchange rate to act as an unbiased predictor of the future spot rate is the exist ence of a time-varying risk premium. This paper models the risk premi um as a latent variable depending upon domestic and foreign asset yie ld volatility, using an unobservable components framework. Estimates of the model for dollar-sterling, dollar-Swiss franc and dollar-Japan ese yen, obtained by maximum likelihood Kalman filtering techniques, are encouraging. Copyright 1988 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1988
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Persistent link: https://EconPapers.repec.org/RePEc:bla:manch2:v:56:y:1988:i:1:p:55-68

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