NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Is it Risk? Explaining Deviations from Uncovered Interest Parity

Robert E. Cumby

NBER Working Paper No. 2380*
Issued in September 1987
NBER Program(s):   ITI    IFM

This paper analyzes ex-ante returns to forward speculation and asks if these returns can be explained by models of a foreign exchange risk premium. After presenting evidence that both nominal and real expected speculative profits are non-zero, the paper examines if real returns to forward speculation are consistent with consumption-based models of risk premia. Estimates of the conditional covariance between real speculative returns and real consumption growth are presented and, like ex-ante returns to forward speculation, they exhibit statistically significant fluctuations over time and often change sign.

*Published: Journal of Monetary Economics, Vol. 22, pp. 279-299, September 1988.

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