The Determinants of Risk Premia in Forward Foreign Exchange (FX) Markets

Aziz Chouikh, Abdelwahed Trabelsi

Abstract


In this paper we reconsider the Fama (1984)’s seminal paper and we make extensions. We take into account for ARMA dynamics and ARCH-M effects in exchange rates and we introduce in equation regressions a proxy for the liquidity. We find out that the differenced relative bid-ask spread is a significant determinant of forward risk premia. In addition we evidence the outperformance of the multimarket hypothesis vs the single market hypothesis and the existence of common factors between forward risk premia in the EUR/USD, EUR/GBP and EUR/JPY forward exchange rates.

Full Text: PDF DOI: 10.5430/ijfr.v5n2p19

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Financial Research
ISSN 1923-4023(Print) ISSN 1923-4031(Online)

 

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