Foreign Exchange Risk Premium and Policy Uncertainty

Thomas C. Chiang ()
Additional contact information
Thomas C. Chiang: Drexel University

Chapter 7 in Encyclopedia of Finance, 2022, pp 585-600 from Springer

Abstract: Abstract This chapter investigates the sources of bias by using a forward foreign exchange rate as a predictor of the corresponding spot exchange rate. The forward exchange rate bias is usually perceived to be associated with a risk factor. Numerous studies, which use variables such as a forward premium, conditional variance, real interest rate differential, and equity premium differential, have attempted to explain the forward-rate bias. This chapter conducts empirical tests that add a number of news-based risk variables in four foreign exchange markets to a proposed model. Testing results suggest that the news-based exchange rate volatility, equity premium differential, economic policy uncertainty differential, and in some cases, a geopolitical risk (GPR) are key factors to explain the forward-rate bias and therefore support the risk premium hypothesis.

Keywords: Forward exchange rate risk premium; Unbiased forward rate hypothesis; Equity premium; Real interest rate; Economic policy uncertainty; Geopolitical risk; F31; F32 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_7

Ordering information: This item can be ordered from
http://www.springer.com/9783030912314

DOI: 10.1007/978-3-030-91231-4_7

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().