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| Content Provider | Springer Nature Link |
|---|---|
| Author | Bhar, Ramaprasad Chiarella, Carl Pham, Toan M. |
| Copyright Year | 2001 |
| Abstract | In this paper we seek to develop a new approach to the time series analysis of foreign exchange risk premia. We do so by assuming a geometric Brownian process for the spot exchange rate and expressing the no-arbitrage spot-forward price relationship under the historical probability measure. We are thereby able to obtain a stochastic differential equation system linking the spot exchange rate, the forward exchange rate and the risk premium (modelled directly as a mean-reverting diffusion process) which we estimate using Kalman filtering techniques. We are able to use observations at a range of frequencies since the framework we set up does not involve overlapping observations. The model is then applied to the French Franc/USD, DEM/USD, GBP/USD, and Japanese Yen/USD exchange rates from 1 January 1990 to 31 December 1998. For all currencies we find evidence that the forward risk premium is stationary and exhibits substantial positive time variation. |
| Starting Page | 341 |
| Ending Page | 360 |
| Page Count | 20 |
| File Format | |
| ISSN | 13872834 |
| Journal | Asia-Pacific Financial Markets |
| Volume Number | 8 |
| Issue Number | 4 |
| e-ISSN | 15736946 |
| Language | English |
| Publisher | Kluwer Academic Publishers |
| Publisher Date | 2001-01-01 |
| Publisher Place | Boston |
| Access Restriction | One Nation One Subscription (ONOS) |
| Subject Keyword | Econometrics Economic Theory International Economics Finance /Banking |
| Content Type | Text |
| Resource Type | Article |
| Subject | Finance |
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