(1) Department of Finance, Drexel University, 3141 Chestnut Street, Philadelphia, PA 19104, USA;(2) Department of Finance, National Chung Hsing University, 250 Kuo Kuang Road, Taichung, 402, Taiwan ROC
Abstract:
This paper constructs a multivariate model in relating multi-asset excess returns to their conditional variances. Applying weekly data to investigate the foreign-exchange risk premium, the evidence from a multivariate GARCH model shows that the foreign-exchange excess returns are significantly correlated with economic fundamentals such as the real interest-rate differential, long-short interest-rate spread differential, and equity-premium differential. The evidence also suggests that foreign-exchange excess returns are not independent of the conditional variances of these fundamental variables, supporting the time-varying risk-premium hypothesis.
