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State-Uncertainty preferences and the Risk Premium in the Exchange rate market

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Jimenez-Martin, Juan-Angel and Novales Cinca, Alfonso (2009) State-Uncertainty preferences and the Risk Premium in the Exchange rate market. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 17, 2009, ] (Unpublished)

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Official URL: http://eprints.ucm.es/8711/


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Abstract

This paper introduces state-uncertainty preferences into the Lucas (1982) economy,showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: “macroeconomic risk” and “the risk associated with variation in the private agents’ perception on the level of uncertainty”. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model.


Item Type:Working Paper or Technical Report
Additional Information:

Corresponding author. Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense, Somosaguas, 28223, Spain. Tel.: +34 91 394 2594. Fax: +34 91 394 2613

Uncontrolled Keywords:Risk premium, Taste shocks, Fundamental uncertainty.
Subjects:Social sciences > Economics > Econometrics
Social sciences > Economics > Macroeconomics
JEL:F31, F41, G12, G15
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2009
Number:17
ID Code:8711
Deposited On:26 Mar 2009 13:54
Last Modified:09 Jun 2017 09:42

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