Risk Premium and Nominal Rigidities

Seongman Moon

No 588, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: This paper investigates implications of nominal rigidities for the risk premium. We use Obstfeld and Rogoff (1998) type DSGE model equipped with nominal rigidities, imperfect market competitions, a production sector, and a money-in-the-utility function. For a monthly frequency, we generate volatility relations derived from violations of unbiasedness in the forward exchange rate and the autocorrelation of the forward premium observed in the data. However, we fail to obtain the same results when the quarterly decision interval is considered mainly because of time varying uncertainty and the discount factor. We also find that real exchange risks and staggered nominal contracts play a role in the determination of the risk premium while habit persistence and asset market structure do not. Finally, our analysis shows that one should be cautious about measuring the risk premium from the regression of ex post predictable returns

Keywords: Nominal rigidities; the risk premium; the forward premium; the expected depreciation; the volatility relations (search for similar items in EconPapers)
JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 2004-08-11
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:feam04:588

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