Aggregate and disaggregate measures of the foreign exchange risk premium |
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| Institution: | 1. Department of Geosciences and Geography, FI-00014, University of Helsinki, Finland;2. Departamento de Ecología y Gestión Ambiental, Centro Universitario de la Región Este, Universidad de la República, Uruguay;3. Helsinki Institute of Sustainability Science, University of Helsinki, FI-00014, Helsinki, Finland;4. Dirección de Coordinación Científica y Gestión Ambiental, Instituto Antártico Uruguayo, Uruguay;5. School of Life Sciences, University of KwaZulu-Natal, Durban 4041, South Africa |
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| Abstract: | Using a disaggregate survey database, this paper reexamines the issue of the existence of a time-varying risk premia in three foreign exchange markets. Previous research on this topic has utilised a consensus measure of the risk premium, based on the rational expectations assumption, and is not supportive of the existence of such a premium. In contrast, this paper reports compelling evidence in favour of time-varying risk premia for the British pound (BP), German mark (DM), and Japanese yen (JY) exchange rates. In particular, we demonstrate that consensus measures of the risk premium mask the existence of risk because of the importance of heterogeneous expectations. |
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