Is the foreign exchange market ‘risky’? Some new survey-based results

In this paper we examine the evidence in favour of time-varying risk premia for four foreign exchange markets. The main novelty in our work is that we use survey-based expectations data to generate risk premia, rather than exploiting the rational expectations assumption. In contrast to the perceived wisdom on the existence of a foreign exchange risk premium, we present positive evidence for the view that risk is an important variable in foreign exchange markets. © 2000 Elsevier Science B.V. All rights reserved.