An Investigation of Risk and Return in Forward Foreign Exchange

55 Pages Posted: 15 Mar 2004 Last revised: 18 Sep 2008

See all articles by Robert J. Hodrick

Robert J. Hodrick

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Sanjay Srivastava

Georgia State University-Robinson College of Business

Date Written: August 1983

Abstract

This paper examines the determination of risk premiums in foreign exchange markets. The statistical model is based on a theoretical model of asset pricing, which leads to severe cross-equation constraints. Statistical tests lead to a rejection of these constraints. We examine the robustness of these tests to time variation in parameters and to the presence of heteroskedasticity. We find that there is evidence for heteroskedasticity and that the conditional expectation of the risk premium is a nonlinear function of the forward premium. Accounting for this nonlinearity, the specification appears to be time invariant. Out of sample portfolio speculaton is profItable but risky.

Suggested Citation

Hodrick, Robert J. and Srivastava, Sanjay, An Investigation of Risk and Return in Forward Foreign Exchange (August 1983). NBER Working Paper No. w1180. Available at SSRN: https://ssrn.com/abstract=305560

Robert J. Hodrick (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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Sanjay Srivastava

Georgia State University-Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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