Finance and Financial Management Commons^™

Information Risk In The International Currency Markets: Evidence From The Violation Of Uirp, Bill B. Francis, Kimberly Gleason, Delroy M. Hunter, Charles A. Malgwi

CRIF Seminar series

Drawing on the theoretical and empirical evidence that private information risk is priced in the expected returns of equities, we hypothesize that information risk premium is an important component of the risk premium that leads to the violation of uncovered interest rate parity (UIRP). Using an asset pricing model in which the risk factors are a world currency factor, a world equity factor, and a world private information factor, we find that UIRP is violated for 28 single currencies plus the euro and that violation is due to the existence of a significant time-varying risk premium. The component of the …