Distribution of Spot and Forward Exchange Rates: Empirical Evidence and Investor Valuation of Skewness and Kurtosis.

This paper examines the statistical distribution of exchange rates for eight major currencies for the post-1973 floating rate period. The results show that spot rates, forward rates, and ex-post risk premia afl exhibit significant, persistent, but varying deviations from normality, and that the risk premia in forward rates reflect investor preferences for skewness and investor aversion towards standard deviation and kurtosis. These results imply that foreign currency forecasting and hedging practices, mean-variance portfolio analysis, pricing of foreign currency options, and other research involving exchange rates should account for these significant deviations from normality. [ABSTRACT FROM AUTHOR]