The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective

54 Pages Posted: 20 Sep 2010

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

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Date Written: August 1994

Abstract

This paper investigates the statistical properties of high frequency nominal exchange rates and forward premiums in the context of a dynamic two-country general equilibrium model. Primary focus is on the persistence, variability, leptokurtosis and conditional heteroskedasticity of exchange rates and on the behavior of foreign exchange risk premiums. The model combines temporal dependencies in preferences with a transaction cost technology that generates a role for money. Agents in the economy make decisions on a weekly frequency and face shocks which display time-varying uncertainty. Simulations reveal that the model accounts for the statistical properties of exchange rate data much more accurately than previous structural models.

Suggested Citation

Bekaert, Geert, The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective (August 1994). NBER Working Paper No. w4818. Available at SSRN: https://ssrn.com/abstract=1677824

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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