Is it risk?: Explaining deviations from uncovered interest parity

This paper analyzes ex ante returns to forward speculation and asks if these returns can be explained by models of a foreign exchange risk premium. After presenting evidence that both nominal and real expected speculative profits are nonzero, the paper examines if real returns to forward speculation are consistent with consumption-based models of risk premia. Estimates of the conditional covariance between real speculative returns and real consumption growth are presented and, like ex ante returns to forward speculation, they exhibit statistically significant fluctuations over time and often change sign.