DP3726 More Evidence on the Dollar Risk Premium in the Foreign Exchange Market

Author(s): Dennis Bams, Kim Walkowiak, Christian C Wolff
Publication Date: January 2003
Keyword(s): forward exchange, risk
JEL(s): F31, G15
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3726

In this article, we develop and estimate an econometric panel data model to capture the common dynamics in dollar risk premia in various forward foreign exchange rates. The common component in the dollar risk premia is highly significant and embodies a common pattern of positive serial correlation (persistence) for the pound, the yen and the mark. Interestingly, our results indicate that the dynamics of the forward prediction error can be attributed almost exclusively to this dollar-related common component. Our evidence also suggests that the three different foreign currencies? dollar risk premia ?respond? to the common factor to different degrees.