Is risk adequately priced?
REAL-LIFE PROBLEMS, INNOVATIVE SOLUTIONS
Background
Excess liquidity has been a key factor driving the FX market over the past year, and there are ominous signs that such conditions are about to change. Low volatility has been found in both equity and fixed-income markets, leading to similar conditions in the currency market. The BNP Paribas risk aversion/appetite indicator is at around -1.8, showing that risk appetite is still very strong. Low risk aversion through 2005 is explained by the accommodative stance of most major central
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