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Macroeconomic sources of foreign exchange risk in new EU members

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  • Kocenda, Evzen
  • Poghosyan, Tigran

Abstract

We address the issue of foreign exchange risk and its macroeconomic determinants in several new EU members. We derive the observable macroeconomic factors--consumption and inflation--using the stochastic discount factor (SDF) approach. The joint distribution of excess returns in the foreign exchange market and the factors are modeled using a multivariate GARCH-in-mean specification. Our findings show that both real and nominal factors play important roles in explaining the variability of the foreign exchange risk premium. Both types of factors should be included in monetary general equilibrium models employed to study excess returns. To contribute to the further stability of domestic currencies, the new EU members should strive to implement stabilization policies aimed at achieving nominal as well as real convergence with the core EU members.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 11 (November)
Pages: 2164-2173

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:11:p:2164-2173

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Keywords: Foreign exchange risk Time-varying risk premium Stochastic discount factor Multivariate GARCH-in-mean New EU member countries;

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References

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Citations

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Cited by:
  1. Vít Bubák & Evžen Kocenda & Filip Zikes, 2010. "Volatility Transmission in Emerging European Foreign Exchange Markets," CESifo Working Paper Series 3063, CESifo Group Munich.
  2. Richard Frensch & Jan Hanousek & Evžen Kočenda, 2012. "Specialization, gravity, and European trade in final goods," Working Papers 320, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  3. Balázs Égert & Evžen Kočenda, 2012. "The impact of macro news and central bank communication on emerging European forex markets," EconomiX Working Papers 2012-20, University of Paris West - Nanterre la Défense, EconomiX.
  4. Evžen Koèenda & Tigran Poghosyan, 2010. "Exchange Rate Risk in Central European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 22-39, February.
  5. Evžen Kocenda & Mathilde Maurel & Gunther Schnabl, 2012. "Short-Term and Long-Term Growth Effects of Exchange Rate Adjustment," CESifo Working Paper Series 4018, CESifo Group Munich.
  6. Nagayasu, Jun, 2012. "The Forward Premium Puzzle And Risk Premiums," MPRA Paper 42472, University Library of Munich, Germany.
  7. Herbert S. Buscher & Hubert Gabrisch, 2011. "What Might Central Banks Lose or Gain in Case of Euro Adoption – A GARCH-Analysis of Money Market Rates for Sweden, Denmark and the UK," IWH Discussion Papers 9, Halle Institute for Economic Research.
  8. Evžen Kočenda & Mathilde Maurel & Gunther Schnabl, 2012. "Short- and long-term growth effects of exchange rate adjustment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748599, HAL.
  9. Kodongo, Odongo & Ojah, Kalu, 2011. "Foreign exchange risk pricing and equity market segmentation in Africa," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2295-2310, September.
  10. Robert Kelm, 2010. "The Exchange Rate and Two Price Inflations in Poland in the Period 1999-2009. Do Globalization and Balassa-Samuelson Effect Matter?," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 2(4), pages 315-349, September.

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