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Empirical Assessment of Foreign Currency Risk Premiums

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Financial Risk: Theory, Evidence and Implications

Abstract

Empirical investigation into the nature and significance of exchange rate risk premiums has evolved from naive studies of the time-series properties of spot and forward exchange rates to sophisticated tests of agents’ first-order conditions for expected utility maximization. Modern empirical work recognizes that any test concerning the behavior of exchange rate risk premiums is necessarily a joint hypothesis test of an equilibrium model of exchange risk and return, an assumption about expectations formation, and a set of auxiliary statistical assumptions under which formal inference proceeds. The evolution in theoretical and econometric sophistication over the past 15 years is the subject of this review. Fortunately, the task of reviewing the risk premium literature has been greatly simplified by the recent publication of a number of related survey papers.1 In particular, this review makes considerable use of Hodrick’s (1987) recent monograph, The Empirical Evidence on the Efficiency of Forward and Future Foreign Exchange Markets.

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  1. Richard Meese
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  1. The Federal Reserve Bank of St. Louis, USA

    Courtenay C. Stone

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© 1989 Kluwer Academic Publishers

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Meese, R. (1989). Empirical Assessment of Foreign Currency Risk Premiums. In: Stone, C.C. (eds) Financial Risk: Theory, Evidence and Implications. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-2665-3_9

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  • DOI: https://doi.org/10.1007/978-94-009-2665-3_9

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