Inference on forward exchange rate risk premium: reviewing signal extraction methods

Bhar, R; Chiarella, C

Inference on forward exchange rate risk premium: reviewing signal extraction methods

Bhar, R Chiarella, C

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Publication Type:: Journal Article
Citation:: International Journal of Monetary Economics and Finance, 2009, 2 (2), pp. 115 - 125
Issue Date:: 2009-01-01

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Field	Value	Language
dc.contributor.author	Bhar, R	en_US
dc.contributor.author	Chiarella, C	en_US
dc.date.issued	2009-01-01	en_US
dc.identifier.citation	International Journal of Monetary Economics and Finance, 2009, 2 (2), pp. 115 - 125	en_US
dc.identifier.issn	1752-0479	en_US
dc.identifier.uri	http://hdl.handle.net/10453/10035
dc.description.abstract	The existence of risk premium is thought to be the reason why forward exchange rate is not an unbiased predictor of future spot exchange rate. In this paper we review two methodologies for inferring this unobserved risk premium based upon signal extraction mechanism. One approach relies on the theory of derivatives pricing that relates historical and risk neutral measures via market price of risk. The other approach specifies the risk premium in the historical measure directly. We compare these two methods in predicting future spot exchange rates and contrast these with that of random walk forecast. © 2009 Inderscience Enterprises Ltd.	en_US
dc.relation.ispartof	International Journal of Monetary Economics and Finance	en_US
dc.relation.isbasedon	10.1504/IJMEF.2009.024835	en_US
dc.title	Inference on forward exchange rate risk premium: reviewing signal extraction methods	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.for	1402 Applied Economics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	open_access
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	2	en_US

Abstract:

The existence of risk premium is thought to be the reason why forward exchange rate is not an unbiased predictor of future spot exchange rate. In this paper we review two methodologies for inferring this unobserved risk premium based upon signal extraction mechanism. One approach relies on the theory of derivatives pricing that relates historical and risk neutral measures via market price of risk. The other approach specifies the risk premium in the historical measure directly. We compare these two methods in predicting future spot exchange rates and contrast these with that of random walk forecast. © 2009 Inderscience Enterprises Ltd.

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http://hdl.handle.net/10453/10035