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

@inproceedings{Baillie2001AMG,
  title={A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets},
  author={Richard T. Baillie and Tim Bollerslev},
  year={2001}
}
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 modeled 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… CONTINUE READING
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