Recent estimates of time-variation in the conditional variance and in the exchange risk premium |
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| Institution: | 1. Department of Mathematics and Statistics, College of Science, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh, Saudi Arabia;2. Department of Mathematics, Faculty of Science, Benha University, Benha, Egypt;3. Department of Mathematics, Faculty of Arts and Sciences, Najran University, Saudi Arabia;4. Department of Mathematics, Faculty of Applied Science, Taiz University, Taiz, Yemen;1. Department of Prosthodontics, School of Stomatology, China Medical University, Shenyang, Liaoning, People''s Republic of China;2. Shenyang National Laboratory for Materials Science, Institute of Metal Research, Chinese Academy of Sciences, Shenyang, Liaoning, People''s Republic of China;1. Chair of Logistics and Quantitative Methods in Business Administration Wuerzburg University Stephanstr. 1, Wuerzburg 97070 Germany;2. Department of Management Science, Lancaster University, Lancaster, United Kingdom |
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| Abstract: | The optimal-diversification model of investors' portfolio behavior can give a linear relationship between the exchange risk premium and the conditional exchange rate variance. This note surveys recent empirical work that allows the conditional variance itself, and therefore the risk premium, to vary over time. In particular, it examines the implications of recent empirical estimates for earlier arguments, based on the assumption that the conditional variance was constant over time, that the exchange risk premium had to be small in magnitude and variability. |
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