Arghyrou, Michael, Lu, Wenna and Pourpourides, Panayiotis  ORCID: https://orcid.org/0000-0002-2986-4094
2025.
Exchange rate risk and deviations from purchasing power parity.
International Journal of Finance & Economics
10.1002/ijfe.3160
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Abstract
This paper proposes a new solution to the purchasing power parity (PPP) puzzles, arguing that investors' higher-order risk attitudes, combined with higher-order uncertainty about nominal exchange rates, as reflected by skewness and kurtosis, drive a risk premium that leads to deviations from PPP. Analysing US dollar exchange rates against the currencies of three major net exporting countries to the US – Canada, Japan, and the European Union – we find that the skewness of the expected nominal exchange rate is the most significant and statistically robust moment-based factor influencing these deviations. Our estimates further suggest that only low to moderate exchange rate risks generate risk premia that contribute to these PPP deviations.
| Item Type: | Article |
|---|---|
| Date Type: | Published Online |
| Status: | In Press |
| Schools: | Schools > Business (Including Economics) |
| Subjects: | T Technology > TX Home economics |
| Publisher: | Wiley |
| ISSN: | 1076-9307 |
| Date of First Compliant Deposit: | 17 March 2025 |
| Date of Acceptance: | 16 March 2025 |
| Last Modified: | 07 Apr 2025 11:42 |
| URI: | https://orca.cardiff.ac.uk/id/eprint/176925 |
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