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December 1987

Risk Aversion, Efficient Markets, and the Forward Exchange Rate

by Kees Koedijk and Mack Ott

Kees G. Koedijk and Mack Ott review the role of the risk premium in foreign exchange markets and its relation to interest rate differentials between the economies involved. They then compare the results of two empirical examinations of the risk-premium-efficiency alternative which yield conflicting conclusions about the economic significance of the foreign exchange rate risk premium.