 Determinants of Currency Risk PremiumsWorking Papers from Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) Abstract: The risk premium is a function of both the interest rate differential and the gap between the current exchange rate and its long-run equilibrium in a model of the foreign exchange market with both non-speculating traders and rational speculators. If the speculators have an alternative to specializing in exchange-rate speculation, then there should be no presumption that uncovered interest rate parity will hold even approximately with a long-run equilibrium number of speculators. Furthermore, when other traders respond to interest-rate differentials, the model can give rise to a negative relationship between the interest-rate differential and the subsequent change in the exchange rate, a phenomenon that is often evident in foreign exchange markets. Keywords: INTERNATIONAL FINANCIAL MARKET; CURRENCIES; EXCHANGE RATE (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fth:purkib:98-006 Access Statistics for this paper More papers in Working Papers from Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) Purdue University, Center for International Business Education and Research, Krannert Graduate School of Management, 1310 Krannert Building West Lafayette, Indiana 47907-1310.. Contact information at EDIRC. |
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