Abstract
In a recent paper in this Journal, we analyze the ‘puzzle’ of excess volatility of risk premia in the foreign exchange market. One of our conclusions was that, allowing for the observed time variation of conditional variances, the static Mean-Variance model can predict movements in risk premia of the same order of magnitude as in the empirical data. Unfortunately, the derivation in our paper contains an error which falsifies our claim. This note presents a brief correction of our previous computations, and an assessment of the corrected results.
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