NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Recent Estimates of Time-Variation in the Conditional Variance and in the Exchange Risk Premium

Jeffrey A. Frankel

NBER Working Paper No. 2367 (Also Reprint No. r1047)
Issued in August 1987
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

The optimal-diversification model of investors' portfolio behavior can give a linear relationship between the exchange risk premium and the conditional exchange rate variance. This note surveys recent empirical work that allows for the conditional variance itself, and therefore the risk premium, to vary over time. In particular, it examines the implications of recent empirical estimates for earlier arguments, based on the assumption that the conditional variance was constant over time, that the exchange risk premium had to be small in magnitude and variability.

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Document Object Identifier (DOI): 10.3386/w2367

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