Using financial experts’ Yen/USD exchange rate expectations provided by
Consensus Forecasts surveys (London), this paper aims to model the 3 and 12-month ahead
ex-ante risk premia measured as the difference between the expected and forward exchange
rates. According to a two-country portfolio asset pricing model, the risk premium is modeled
as the product of three factors: a constant risk aversion coefficient, the expected variance of
the rate of change in the real exchange rate, and the spread between domestic agent’s market
position in foreign assets and foreign agent’s market position in domestic assets (net market
position). When the returns are partially predictable, the expected variance is horizondependent
and this is a sufficient condition for agents not to require at any time a unique risk
premium for all maturities but a set of premia scaled by the time horizon of the investment.
For each horizon the expected variance is assumed to depend on the historical values of the
variance and on the unobservable maturity-dependent net market positions which have been
estimated through a state space model using the Kalman filter methodology. We find that the
model explains satisfactorily both the common and the non-random specific time-patterns of
the 3- and 12-month ex-ante premia.