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