The Behavior of Eurocurrency Returns Across Different Holding Periods and Monetary Regimes



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    • University of Pennsylvania, New York University, and National Bureau of Economic Research. For useful comments, I am grateful to two anonymous referees, Bob Cumby, René Stulz, and seminar participants at the National Bureau of Economic Research Summer Institute, Columbia University, the Wharton School, University of Michigan, and New York University. I am also indebted to Alberto Giovannini and Philippe Jorion for providing the 7-day Eurocurrency deposit data, to Ross Levine and Steve Scott for assistance in using the DRI daily data tape, and to Naveen Seth for superb research assistance. Research support from the Glucksman Institute and the Salomon Brothers Center for Financial Studies is acknowledged with thanks. Any errors are mine alone.


Recent empirical studies of the risk premium across foreign exchange and other asset markets such as equity and longer term bonds have found conflicting evidence about the latent variable model restrictions of the consumption-based intertemporal capital asset pricing model. While studies using data for holding periods of one month or less generally reject the model, evidence using three-month holding periods indicates that the model cannot be rejected when including the returns on long relative to short deposit rates. This paper investigates the sources of differences in results using returns on foreign exchange and Eurocurrency deposits at three different maturities.