Is it Risk? Explaining Deviations from Uncovered Interest Parity

Abstract

This paper analyzes ex-ante returns to forward speculation and asks if these returns can be explained by models of a foreign exchange risk premiumi After presenting evidence that both nominal and real epected speculative profits are non-zero, the paper examines if real returns to forward speculation are consistent with consumption-based models of risk premia.Estimates of the conditional covariance between real speculative returns and real consumption growth are presented and, like ex-ante returns to forward speculation, they exhibit statistically significant fluctuations over time and often change sign.

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