Modelling the currency forward risk premium: A new perspective

Bhar, R; Chiarella, C; Pham, TM

Modelling the currency forward risk premium: A new perspective

Bhar, R Chiarella, C Pham, TM

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Publication Type:: Journal Article
Citation:: Asia-Pacific Financial Markets, 2001, 8 (4), pp. 341 - 360
Issue Date:: 2001-01-01

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Field	Value	Language
dc.contributor.author	Bhar, R	en_US
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	Pham, TM	en_US
dc.date.issued	2001-01-01	en_US
dc.identifier.citation	Asia-Pacific Financial Markets, 2001, 8 (4), pp. 341 - 360	en_US
dc.identifier.issn	1387-2834	en_US
dc.identifier.uri	http://hdl.handle.net/10453/13986
dc.description.abstract	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.	en_US
dc.relation	http://purl.org/au-research/grants/arc/A10010022
dc.relation.ispartof	Asia-Pacific Financial Markets	en_US
dc.relation.isbasedon	10.1023/A:1020643612751	en_US
dc.subject.classification	Finance	en_US
dc.title	Modelling the currency forward risk premium: A new perspective	en_US
dc.type	Journal Article
utslib.citation.volume	4	en_US
utslib.citation.volume	8	en_US
utslib.for	150205 Investment and Risk Management	en_US
utslib.for	1502 Banking, Finance and Investment	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	closed_access
pubs.issue	4	en_US
pubs.publication-status	Published	en_US
pubs.volume	8	en_US

Abstract:

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.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/13986