Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium

34 Pages Posted: 13 Nov 2007 Last revised: 29 Sep 2010

See all articles by Robert P. Flood

Robert P. Flood

International Monetary Fund (IMF) - Research Department; CENTRUM Business School; National Bureau of Economic Research (NBER)

Nancy Peregrim Marion

Dartmouth College - Department of Economics

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Date Written: June 1989

Abstract

Most of the literature on two-tier exchange markets is built around models in which domestic policy can exert a powerful influence on the spread between the current account exchange rate and the capital account exchange rate. We show that if optimizing agents are risk neutral, domestic policy has no significant influence on the spread. Our work with Belgian data suggests that a nsk neutral specification for Belgian residents acting in the two-tier market is hard to reject, and we also find evidence that domestic variables do not affect the Belgian spread.

Suggested Citation

Flood, Robert P. and Marion, Nancy P., Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium (June 1989). NBER Working Paper No. w3015, Available at SSRN: https://ssrn.com/abstract=463461

Robert P. Flood (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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CENTRUM Business School

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National Bureau of Economic Research (NBER)

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Nancy P. Marion

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
(603) 646-2511 (Phone)

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