Carlson, John A. and Osler, Carol L. (Carol Lee). "Determinants of Currency Risk Premiums, Staff Report 70," Staff Reports (Federal Reserve Bank of New York) (March 1999). https://fraser.stlouisfed.org/title/9235/item/673948, accessed on April 25, 2025.

Title: Determinants of Currency Risk Premiums, Staff Report 70

Authors: Carlson, John A., Osler, Carol L. (Carol Lee)
Date: March 1999
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Date: March 1999
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Abstract:
This paper presents a theoretical model of exchange-rate determination intended to address the forward premium puzzle. It also explains the empirical observation that risk premiums depend on interest differentials. The model's closed-form solution indicates that currency risk premiums depend on two factors: interest differentials and the current deviation of the exchange rate from its long-run equilibrium. If speculators have an alternative to exchange-rate speculation, then there is no presumption that uncovered interest parity holds even approximately in long-run equilibrium. The model is consistent with existing evidence suggesting that forward premiums are negatively related to rationally expected future exchange rate changes. New empirical evidence is provided in support of the model.
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  • jel: F31; F47
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