The Review of Asset Pricing Studies Vol. 10 No. 1 2020
Real Exchange Rates and Currency Risk Premiums
Abstract
Standard finite horizon tests uncover only weak evidence of the predictive power of the real exchange rate for excess currency returns. On the other hand, in long-horizon tests, the real exchange rate strongly and negatively predicts future excess currency returns. Conversely, we can attribute most of the variability in real exchange rates to changes in currency risk premiums. The “habit” and “long-run risks” models replicate the predictive power of the real exchange rate for excess currency returns, but substantially overstate the fraction of the volatility of the real exchange rate due to risk premiums. Received December 14, 2017; Editorial decision October 14, 2018 by Editor: Raman Uppal.
- DOI
- 10.1093/rapstu/raz002
- Volume
- 10
- Issue
- 1
- Pages
- 94-121
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref