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Exchange Rate Regimes and Risk Premia under Alternative Wage Structure
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This paper analyzes the relationship between risk premium and exchange rate regimes. I conclude that fixed exchange regime is preferred to flexible regime, and risk premium is lower under fixed regime. I analyze this problem with the friction where there are two types of wages; a conventional wage available to the current period consumption and a deferred wage paid at the end of period. When deferred wage increases, the real exchange rate and capital used for the next period production is higher under the flexible exchange regime. Since production in the current period can be defined as a negative function of real exchange rate, higher increase of real exchange rate leads into lower production when a positive deferred wage shock occurs under flexible regime. As a result, fixed regime is preferred thanks to lower volatility in consumption. In addition, remaining wealth is further reduced. The reduce of remaining wealth, increase of real exchange rate, and a surge of capital lead into the increase of leverage ratio. Therefore, the risk premium under the flexible regime is higher. When I replace a deferred wage shock with technology shock and world interest rate shock, still risk premium under flexible regime is higher than under fixed regime. The addition of the asset holders with the assumption of exogenous segmented asset market does not change these results. The second chapter utilizes a uniques high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the ruturns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies sustematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news.