Survey of Literature on Covered and Uncovered Interest Parities

- 18 -

Where x is proportional to the degree of risk aversion, θ, bt, and b*t are the shares
of world wealth in domestic assets and foreign assets respectively and var(st+1) is the
conditional variance of the future exchange rate. Or as in a bond-market led speculative
attack model as:

i=i^* +∆s^et+1 +θ(b_t -b_t^* -s_t)

Another interesting modification specific to emerging markets is suggested by
Arida, Bacha and Lara-Resende (2004) wherein the risk premium depends on the
interaction between judicial uncertainty (the uncertainty that contracts will be enforced
by courts) and capital controls.

<<   <   16   17   18   19   20   21   22   >   >>