The Covariation of Risk Premiums and Expected Future Spot Exchange Rates

37 Pages Posted: 6 Jul 2004 Last revised: 28 Mar 2010

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: October 1985

Abstract

Fama(1984) analyzed the variability and the covariation of risk premiums and expected rates of depreciation. We employ three statistical techniques that do not suffer from a potential bias in Fama's analysis, but we nevertheless confirm his findings. In contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium. Increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market, and risk premiums have larger variances than expected rates of depreciation.

Suggested Citation

Hodrick, Robert J. and Srivastava, Sanjay, The Covariation of Risk Premiums and Expected Future Spot Exchange Rates (October 1985). NBER Working Paper No. w1749. Available at SSRN: https://ssrn.com/abstract=338810

Robert J. Hodrick (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
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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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