A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets

Journal Article (Journal Article)

Assuming that daily spot exchange rates follow a martingale process, we derive the implied time series process for the vector of 30-day forward rate forecast errors from using weekly data. The conditional second moment matrix of this vector is modelled as a multivariate generalized ARCH process. The estimated model is used to test the hypothesis that the risk premium is a linear function of the conditional variances and covariances as suggested by the standard asset pricing theory literature. Little supportt is found for this theory; instead lagged changes in the forward rate appear to be correlated with the 'risk premium.'. © 1990.

Full Text

Duke Authors

Cited Authors

  • Baillie, RT; Bollerslev, T

Published Date

  • January 1, 1990

Published In

Volume / Issue

  • 9 / 3

Start / End Page

  • 309 - 324

International Standard Serial Number (ISSN)

  • 0261-5606

Digital Object Identifier (DOI)

  • 10.1016/0261-5606(90)90012-O

Citation Source

  • Scopus