On Time-Series Properties of Time-Varying Risk Premium in the Yen/Dollar Exchange Market

Fabio Canova, Takatoshi Ito

NBER Working Paper No. 2678 (Also Reprint No. r1610)
Issued in September 1991
NBER Program(s):   ITI   IFM

The purpose of this paper is to characterize the changes in risk premium in the 1980s. A five-variable vector autoregressive model (VAR) is constructed to calculate a risk premium series in the foreign exchange market. The risk premium series is volatile and time-varying. The hypothesis of no risk premium is strongly rejected for the entire sample and each of the two subsamples considered. Various tests using the constructed risk premium series suggest that a risk premium existed but it was neither constant nor stable over subsamples and that its volatility was considerably reduced after October 1982.

(313 K)

(186 K)

Published: "The Time-Series Properties of the Risk Premium in the Yen/Dollar Exchange Market." From Journal of Applied Econometrics, Vol. 6, pp. 125-142, (1991) .

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