Exchange Rates, Risk Premia and New Information: A Note

Charles Bean

No 53, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This note re-examines the results of tests of the hypothesis that the forward exchange rate is an unbiased and efficient predictor of the future spot exchange rate. As an alternative hypothesis we posit the existence of a time-varying risk premium. We show that it is possible to place a lower-bound on the variance of this term. The results suggest that for three out of the four bilateral rates examined new information explains less than half the variance of the difference between the forward rate and the realised future spot rate.

Keywords: Efficient Markets; Exchange Rates; Risk Premia (search for similar items in EconPapers)
Date: 1985-02
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