Pricing Currency Risk: Facts and Puzzles from Currency Boards

Sergio Schmukler and Luis Servén

No 9047, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Hard pegs, such as currency boards, intend to reduce or even eliminate currency risk. This paper investigates the patterns and determinants of the currency risk premium in two currency boards -- Argentina and Hong Kong. Despite the presumed rigidity of currency boards, the currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. Currency premia differ across markets. The forward discount typically exceeds the currency premium derived from interbank rates, particularly during crisis times. The large magnitude of these cross-market differences can be the consequence of unexploited arbitrage opportunities, market segmentation, or other risks embedded in typical measures of currency risk. The premium and its term structure depend on domestic and global factors, related to devaluation expectations and risk perceptions.

JEL-codes: F31 F36 (search for similar items in EconPapers)
Date: 2002-07
Note: AP IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published as Schmukler, Sergio L. and Luis Serven. "Pricing Currency Risk Under Currency Boards," Journal of Development Economics, 2002, v69(2,Dec), 367-391.

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