Market Instability and Revision Error in Risk Premium |
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Authors: | Heeho Kim |
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Institution: | (1) Department of Economics, Kyungpook National University, SanGyuk Dong 1370, Buk-Gu, Daegu, 702-701, South Korea |
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Abstract: | This paper provides a theory and evidence that the risk premium puzzle is viewed as a phenomenon pertaining to the unstable
foreign exchange market. In an unstable market, revision error uncompensated by an initial risk premium accrues due to consumer
expectation revision about the ex ante uncertainty of the exchange rate. The risk premium widely deviates from its initial level, depending on the frequency of
the consumer expectation revision and the degree of risk aversion. Subsequent evidence shows the existence of the revision
errors for the risk premium during the Asian currency crisis and the recent financial crisis periods. |
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Keywords: | |
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