TY  - JOUR
AB  - In this paper we seek to develop a new approach to the time series analysis of foreign exchange risk premia. We do so by assuming a geometric Brownian process for the spot exchange rate and expressing the no-arbitrage spot-forward price relationship under the historical probability measure. We are thereby able to obtain a stochastic differential equation system linking the spot exchange rate, the forward exchange rate and the risk premium (modelled directly as a mean-reverting diffusion process) which we estimate using Kalman filtering techniques. We are able to use observations at a range of frequencies since the framework we set up does not involve overlapping observations. The model is then applied to the French Franc/USD, DEM/USD, GBP/USD, and Japanese Yen/USD exchange rates from 1 January 1990 to 31 December 1998. For all currencies we find evidence that the forward risk premium is stationary and exhibits substantial positive time variation. © 2002 Kluwer Academic Publishers.
AU  - Bhar, R
AU  - Chiarella, C
AU  - Pham, TM
DA  - 2001/01/01
DO  - 10.1023/A:1020643612751
EP  - 360
JO  - Asia-Pacific Financial Markets
PY  - 2001/01/01
SP  - 341
TI  - Modelling the currency forward risk premium: A new perspective
VL  - 8
Y1  - 2001/01/01
Y2  - 2026/07/02
ER  -