Foreign Exchange Risk Premia and Goods Market Frictions

Seongman Moon

East Asian Economic Review, 2015, vol. 19, issue 1, 3-38

Abstract: Fama's (1984) volatility relations show that the risk premium in foreign exchange markets is more volatile than, and is negatively correlated with the expected rate of depreciation. This paper studies these relations from the perspective of goods markets frictions. Using a sticky-price general equilibrium model, we show that near-random walk behaviors of both exchange rates and consumption, in response to monetary shocks, can be derived endogenously. Based on this approach, the paper provides quantitative results on Fama's volatility relations.

Keywords: Foreign Exchange Risk Premium; Forward Premium Anomaly; Random Walk Behaviors; Staggered Price Setting; Interest-sensitive Money Demand; Monetary Shocks (search for similar items in EconPapers)
JEL-codes: F31 F37 F41 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0029

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