Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?

THE REVIEW OF FINANCIAL STUDIES, Vol. 8 No. 3

Posted: 23 Aug 1998

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Abstract

Foreign exchange returns exhibit behavior difficult to reconcile with standard theoretical models. This paper asks whether the recent findings of long swings in exchange rates between appreciating and depreciating periods affect estimates of the foreign exchange risk premium. We demonstrate how the "peso problem" introduced by expected shifts in exchange rate regimes can affect inferences about the risk premium in at least two ways: (1) it can make the foreign exchange risk premium appear to contain a permanent disturbance when it does not; and (2) it can induce bias in the foreign exchange return regressions such as in Fama (1984).

JEL Classification: F31

Suggested Citation

Evans, Martin D.D. and Lewis, Karen Kay, Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?. THE REVIEW OF FINANCIAL STUDIES, Vol. 8 No. 3, Available at SSRN: https://ssrn.com/abstract=6819

Martin D.D. Evans

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1570 (Phone)
202-687-6102 (Fax)

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7637 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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