Working Paper: CEPR ID: DP3726
Authors: Dennis Bams; Kim Walkowiak; Christian C. Wolff
Abstract: 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.
Keywords: Forward Exchange; Risk
JEL Codes: F31; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| common component (Y20) | dollar risk premium (F31) |
| common component (Y20) | risk premia dynamics (G19) |
| common component (Y20) | forward prediction error (C53) |
| common component (Y20) | dollar risk premia (pound) (F31) |
| common component (Y20) | dollar risk premia (mark) (F31) |
| common component (Y20) | dollar risk premia (yen) (F31) |