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Foreign Exchange Risk Premia and Goods Market Frictions

Author

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  • Moon, Seongman

    (Chonbuk National University)

Abstract

Fama's (1984) volatility relations show that the risk premium in foreign exchange markets is more volatile than, and is negatively correlated with the expected rate of depreciation. This paper studies these relations from the perspective of goods markets frictions. Using a sticky-price general equilibrium model, we show that near-random walk behaviors of both exchange rates and consumption, in response to monetary shocks, can be derived endogenously. Based on this approach, the paper provides quantitative results on Fama's volatility relations.

Suggested Citation

  • Moon, Seongman, 2015. "Foreign Exchange Risk Premia and Goods Market Frictions," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 19(1), pages 3-38, March.
    • Handle: RePEc:ris:eaerev:0029
    DOI: 10.11644/KIEP.JEAI.2015.19.1.289
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    Keywords

    Foreign Exchange Risk Premium; Forward Premium Anomaly; Random Walk Behaviors; Staggered Price Setting; Interest-sensitive Money Demand; Monetary Shocks;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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