Wealth Distribution Across Nations and the Risk Premium in the Foreign Exchange Market

Peter Bossaerts

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: Changes in the risk premium are postulated to be related to changes in the distribution of wealth across nations induced by the exchange rate. The model is empirically supported for six out of nine currencies. For the other currencies, the results are as expected, but insignificance inhibits further conclusions. The relationship implied by the model is however not strong enough to neutralize the negative correlation generally observed between forward premia and subsequent changes in spot rates.

Date: 1985-08-01
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