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Reexamining what survey data say about currency risk and irrationality using the cointegrated VAR

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  • Josh Stillwagon

    (Trinity College)

Abstract

This paper reports new evidence of a time-varying risk premium, and against the usual interpretation of irrationality, in survey data for three major currency markets. Using the cointegrated VAR to better focus on the issue of persistence, the deviations from Uncovered Interest Parity are found to be non-stationary implying a time-varying risk premium. Further, the "relationship" between the forecast error and the lagged forward discount, which has been interpreted as implying irrationality, is a spurious regression, being non-stationary at the 1% level. In fact, the forecast error and forward discount do not even appear to share the same order of integration.

Suggested Citation

  • Josh Stillwagon, 2014. "Reexamining what survey data say about currency risk and irrationality using the cointegrated VAR," Economics Bulletin, AccessEcon, vol. 34(3), pages 1631-1643.
    • Handle: RePEc:ebl:ecbull:eb-14-00253
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    References listed on IDEAS

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    Cited by:

    1. Josh R. Stillwagon, 2015. "Can the Consumption Capital Asset Pricing Model Account for Traders' Expected Currency Returns?," Review of International Economics, Wiley Blackwell, vol. 23(5), pages 1044-1069, November.
    2. Nevin Cavusoglu & Michael D. Goldberg & Joshua Stillwagon, 2019. "New Evidence on the Portfolio Balance Approach to Currency Returns," Working Papers Series 89, Institute for New Economic Thinking.
    3. Juselius, Katarina & Stillwagon, Josh R., 2018. "Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 93-105.

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    More about this item

    Keywords

    Survey data; Exchange rates; Excess returns; Risk premium; Non-stationarity; Irrationality;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G0 - Financial Economics - - General

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