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The Foreign Exchange Risk Premium: Real and Nominal Factors

Burton Hollifield () and Amir Yaron
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Amir Yaron: U of Pennsylvania

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: We estimate the effects of conditional inflation moments on predictable returns available from currency speculation using an arbitrage based model to decompose the risk premium into conditional inflation, real risk, and their interactions. Using two different empirical methods to identify these components, we find that virtually none of the predictable variation in returns from currency speculation can be explained empirically by either conditional inflation risk or the interaction between conditional inflation and real risks. Our results imply that for monetary policy to have significant effects on the risk-premia for currency speculation, monetary policy must have small effect on inflation risk, the relationship between real risk and inflation risk, and instead must mainly impact real exchange rate risk.

JEL-codes: F31 (search for similar items in EconPapers)
Date: 2001-02
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Related works:
Working Paper: The Foreign Exchange Risk Premium: Real and Nominal Factors (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:01-1

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