Volume 15 | Issue 1 | Article 3

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The Won/Dollar Forward Exchange return and Risk premium: Empirical Evidence from the 1997 Korean Financial Crisis
Taewoo You, Mark Holder, and Thomas C. Chiang (F31)

This paper examines the unbiased forward rate hypothesis (UFH) of the won/dollar exchange rate based on different model specifications during the period of the Korean financial crisis. The UFH is consistently rejected, and the Asian crisis plays a significant role in explaining the time-varying risk premium in the Korean foreign exchange market. On average, the estimated risk premium during the crisis period ranges from 1.1% to 2.2% per week, while in the post-crisis period, the premium decreased to 0.24% - 0.36% per week. Evidence indicates that the relative macroeconomic uncertainties are the major factors that contribute to the time-varying risk premium.