TY  - JOUR
AU  - Svensson,Lars E.O.
TI  - The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3466
PY  - 1990
Y2  - October 1990
UR  - http://www.nber.org/papers/w3466
L1  - http://www.nber.org/papers/w3466.pdf
N1  - Author contact info:
Lars E.O. Svensson
Sveriges Riksbank
SE-103 37 Stockholm
SWEDEN
Tel: +46 8 787 0107
Fax: +46 8 21 0531
E-Mail: lars.svensson@iies.su.se
AB  - The foreign exchange risk premium in an exchange rate target zone regime with devaluation/realignment risks is derived. In contrast to previous literature, the exchange rate's heteroscedasticity within the bard, as well as a separate devaluation/realignment risk, is taken into account. The risk premium is then the sum of two separate risk premia, arising from stochastic exchange rate movements within the bard and from stochastic devaluations/realignments when the band is shifted. Both real and nominal exchange rate premia are considered. The real and nominal risk premia from movements within the band are very small for narrow target zones and can therefore be disregarded. The real and nominal risk premia from devaluations/realignments are larger but still relatively small proportions of the expected rate of devaluation/realignment.
ER  -