Abstract
AbstractIn this paper a VAR model is employed to construct a measure of the conditional expectations of the future yen/dollar spot rate. This measure allows us to examine the dynamics of an ex‐ante time‐series for the risk premium in the market. The VAR model produces ‘better’ forecasts than the survey responses for turbulent periods such as 1981–1982 and 1984–1985. The VAR‐generated expectations are then used to construct a risk premium time‐series. This risk premium series seems to be more reliable than the ones obtained using either survey data on expectations of the future spot exchange rate or the ex‐post realized spot exchange rate. Tests on the risk premium series suggest that a risk premium was present, but that it was virtually constant throughout the sample. The conditional variance of the risk premium changed over time, but its unconditional distribution seemed stable across subsamples. Despite these features, the volatility of the series was substantial and varied considerably throughout the sample.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
