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

26 Pages Posted: 15 Feb 2006

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: October 11, 1989

Abstract

In this paper we develop and test a model of a utility maximizing representative agent operating in the Belgium-Luxembourg two-tier foreign exchange market. Our tests examine and fail to reject a risk neutral representative agent utility function. When we combine a risk neutral utility function with goods arbitrage we end up with the implication that the proportionate spread between the current account and financial exchange rates is not influenced by domestic policy. This implication is not rejected in some additional tests relating the Belgium-Luxembourg two-tier market spread to some Belgian policy variables and some foreign variables.

JEL Classification: 432

Suggested Citation

Flood, Robert P. and Marion, Nancy P., Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium (October 11, 1989). IMF Working Paper No. 89/83, Available at SSRN: https://ssrn.com/abstract=885015

Robert P. Flood (Contact Author)

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

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CENTRUM Business School

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Los Alamos de Monterrico
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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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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