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On Tests of the Existence of Time Variable Risk Premia in the Forward Foreign Exchange Market

  • Author(s): Bossaerts, Peter
  • et al.
Abstract

It is shown here that the existence of a time variable risk premium cannot be tested without additional specification as to how such a premium should be related to observable variables. Recent empirical results are discussed in this context and it is argued that no conclusive evidence of a time variable risk premium has been found as yet because of the possibility of market inefficiency. A similar criticism applies to tests concerning futures markets and markets for (nominally) risk free assets.

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