The forward risk premium, demand for money, and international financial markets

This thesis explores two aspects of international money and financial markets. First, I analyze the determinants of the foreign exchange forward risk premium. Second, I study the demand for money in different countries.;Existing models have not been able to account for the empirical properties of the forward risk premium. The most salient failure of these models is their inability to reconcile the high variability of the forward risk premium with the low variability in the growth rate of observed aggregate consumption. Chapter two formulates, estimates and tests an intertemporal. asset pricing model. The forward risk premium formula is constructed based on the preference specification used by Epstein and Zin (1989), without using consumption data. In addition, I explicitly model the time varying conditional second moments of the asset returns. This is useful for quantifying the dynamics of the underlying risks associated with holding foreign assets.;I find that my model can account for various shortcomings of other models in the literature. First, my point estimates of the parameters characterizing agents' risk aversion are much more reasonable than existing estimates. Second, I cannot reject, using formal econometric tests, that my model is consistent with the variability of the forward risk premium of major dollar exchange rates.;Chapter three investigates the demand for money in the U.S. and Canada. Ball (2000) argues that many of the standard difficulties associated with estimating the U.S. money demand are resolved when data from the 90s are incorporated into the analysis. In this chapter, I study the robustness of Ball's results by considering the demand for money in Canada. I find that Ball's conclusions about the US do not apply to Canada. I explore the role of shifts in the demand for money caused by institutional changes in accounting for the apparent instability in Canadian money demand. Once these shifts are taken into account, I can estimate the demand for money in Canada more reliably. I find that the income and the interest elasticity of money demand in the US and Canada are very similar.