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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
The pricing of forward exchange rates
Ross Levine
Abstract

This paper addresses the question: do risk premia account for the observed time-varying discrepancies between forward and corresponding future spot exchange rates? A simple theoretical framework is used to derive testable restrictions on the parameters of a multivariate regression model. Using various econometric procedures and different estimation periods, the data reject the restrictions. In contrast to past investigations, the empirical results are inconsistent with a world in which time-varying risk premia are the sole determinants of observed deviations from the unbiased expectations hypothesis. Anticipated real exchange rate movements may explain the rejection.


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Ross Levine, The pricing of forward exchange rates, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 312, 1987.
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Keywords: Foreign exchange futures ; Prices ; Foreign exchange rates
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