NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Covariation of Risk Premiums and Expected Future Spot Exchange Rates

Robert J. Hodrick, Sanjay Srivastava

NBER Working Paper No. 1749 (Also Reprint No. r0731)
Issued in October 1985
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w1749

Published: Hodrick, Robert J. and Sanjay Srivastava. "The Covariation of Risk Premiums and Expected Future Spot Exchange Rates," with comment by Jacob A. Frenkel. Journal of International Money and Finance, Vol. 5, Supplement, (March 1986), pp. 5-30.

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