Measuring the forward foreign exchange risk premium: multi-country evidence from unobserved components models |
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| Affiliation: | 1. Technische Universität Dresden, Chair of International Monetary Economics and Halle Institute for Economic Research (IWH), Department of Financial Markets, Germany;2. Technische Universität Dresden, Chair of International Monetary Economics, Germany;1. Università Carlo Cattaneo LIUC and CEPR, Istituto di Economia, Corso Matteotti 22, Castellenza, VA 21053, Italy;2. Swiss National Bank, Boersenstrasse 15, PO Box, CH 8022, Switzerland;1. The Chinese University of Hong Kong, Shenzhen, China;2. Bank for International Settlements, Hong Kong Special Administrative Region |
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| Abstract: | We investigate the nature of the foreign exchange risk premium for a wide range of currencies, using unobserved components models with exactly matched spot and forward exchange rate data. Significant time-variation of the risk premium is documented for most currencies. Our estimates indicate considerable persistence in the risk premium, and suggest that the variability of the risk premium is quite low relative to the variability of the forward forecast error. |
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