Working Paper: NBER ID: w2380
Authors: Robert E. Cumby
Abstract: This paper analyzes ex-ante returns to forward speculation and asks if these returns can be explained by models of a foreign exchange risk premium. After presenting evidence that both nominal and real expected speculative profits are non-zero, the paper examines if real returns to forward speculation are consistent with consumption-based models of risk premia. Estimates of the conditional covariance between real speculative returns and real consumption growth are presented and, like ex-ante returns to forward speculation, they exhibit statistically significant fluctuations over time and often change sign.
Keywords: forward speculation; risk premium; uncovered interest parity
JEL Codes: F31; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward speculation returns (G17) | consumption growth (E20) |
| forward speculation returns (G17) | conditional covariance with consumption growth (F62) |
| conditional covariance with consumption growth (F62) | speculative returns (D84) |
| speculative returns (D84) | expected real profits (G17) |
| expected real profits (G17) | forward speculation returns (G17) |