The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective / Geert Bekaert.

By:

Bekaert, Geert

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4818.Publication details: Cambridge, Mass. National Bureau of Economic Research 1994.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: This paper investigates the statistical properties of high frequency nominal exchange rates and forward premiums in the context of a dynamic two-country general equilibrium model. Primary focus is on the persistence, variability, leptokurtosis and conditional heteroskedasticity of exchange rates and on the behavior of foreign exchange risk premiums. The model combines temporal dependencies in preferences with a transaction cost technology that generates a role for money. Agents in the economy make decisions on a weekly frequency and face shocks which display time-varying uncertainty. Simulations reveal that the model accounts for the statistical properties of exchange rate data much more accurately than previous structural models.

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Previous	nber w4815 Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty /	nber w4816 Reference Point Dependence for Specification Bias from Quality Upgrading /	nber w4817 Intermediate Goods and Business Cycles: Implications for Productivity and Welfare /	nber w4818 The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective /	nber w4819 Financial Intermediation and Aggregate Fluctuations: A Quantative Analysis /	nber w4820 The Tax Unit and Household Production /	nber w4821 The Impact of Monetary Policy on Bank Balance Sheets /	Next

August 1994.

This paper investigates the statistical properties of high frequency nominal exchange rates and forward premiums in the context of a dynamic two-country general equilibrium model. Primary focus is on the persistence, variability, leptokurtosis and conditional heteroskedasticity of exchange rates and on the behavior of foreign exchange risk premiums. The model combines temporal dependencies in preferences with a transaction cost technology that generates a role for money. Agents in the economy make decisions on a weekly frequency and face shocks which display time-varying uncertainty. Simulations reveal that the model accounts for the statistical properties of exchange rate data much more accurately than previous structural models.