State-Uncertainty Preferences and the Risk Premium in the Exchange Rate Market

25 Pages Posted: 7 Mar 2009

See all articles by Juan-Angel Jiménez-Martin

Juan-Angel Jiménez-Martin

Complutense University of Madrid

Alfonso Novales Cinca

Universidad Complutense de Madrid

Date Written: March 6, 2009

Abstract

This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: macroeconomic risk and the risk associated with variation in the private agents' perception on the level of uncertainty. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model.

Keywords: risk premium, taste shocks, fundamental uncertainty

JEL Classification: F31, F41, G12, G15

Suggested Citation

Jiménez-Martin, Juan-Angel and Novales Cinca, Alfonso, State-Uncertainty Preferences and the Risk Premium in the Exchange Rate Market (March 6, 2009). Available at SSRN: https://ssrn.com/abstract=1354674 or http://dx.doi.org/10.2139/ssrn.1354674

Juan-Angel Jiménez-Martin (Contact Author)

Complutense University of Madrid ( email )

Complutense University of Madrid
Campus de somosaguas
Pozuelo de Alarcon, Madrid 28223
Spain
+34 91 3942355 (Phone)

HOME PAGE: http://www.ucm.es/fundamentos-analisis-economico2/jajm

Alfonso Novales Cinca

Universidad Complutense de Madrid ( email )

Campus of Somosaguas
Madrid
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
268
Abstract Views
711
rank
128,824
PlumX Metrics