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Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market

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  • Vít Pošta
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    Abstract

    The paper presents both the theoretical account of the issue of foreign exchange risk premium and the actual estimates of the time-varying risk premium for the cases of the Czech koruna to euro and US dollar. The risk premium is modelled within a state space framework and estimated using the Kalman filtering procedure. Some financial market fundamentals are used to estimate the risk premium, and thus not only do the estimates give insight into the foreign exchange market behaviour but also into some linkages between the various segments of the financial market as a whole.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Prague Economic Papers.

    Volume (Year): 2012 (2012)
    Issue (Month): 1 ()
    Pages: 3-17

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    Handle: RePEc:prg:jnlpep:v:2012:y:2012:i:1:id:407:p:3-17

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    Related research

    Keywords: Kalman filter; interest rate parity; foreign exchange risk premium; financial market;

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    References

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    1. John Y. Campbell & John H. Cochrane, 1999. "Explaining the Poor Performance of Consumption-Based Asset Pricing Models," NBER Working Papers 7237, National Bureau of Economic Research, Inc.
    2. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
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    4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    10. Fabio Canova & Takatoshi Ito, 1988. "On Time-Series Properties of Time-Varying Risk Premium in the Yen/Dollar Exchange Market," NBER Working Papers 2678, National Bureau of Economic Research, Inc.
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    12. Boubakri, Salem & Guillaumin, Cyriac, 2011. "Financial integration and currency risk premium in CEECs: Evidence from the ICAPM," Emerging Markets Review, Elsevier, vol. 12(4), pages 460-484.
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    14. Lewis, Karen K, 1989. "Changing Beliefs and Systematic Rational Forecast Errors with Evidence from Foreign Exchange," American Economic Review, American Economic Association, vol. 79(4), pages 621-36, September.
    15. John Barkoulas & Christopher F. Baum, 1996. "Time-Varying Risk Premia in the Foreign Currency Futures Basis," Boston College Working Papers in Economics 281., Boston College Department of Economics.
    16. Karen K. Lewis, 1994. "Puzzles in International Financial Markets," NBER Working Papers 4951, National Bureau of Economic Research, Inc.
    17. C. Emre Alper & Oya Pinar Ardic & Salih Fendoglu, 2007. "The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey," Working Papers 2007/13, Bogazici University, Department of Economics.
    18. 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.
    19. De Paoli, Bianca & Sondergaard, Jens, 2009. "Foreign exchange rate risk in a small open economy," Bank of England working papers 365, Bank of England.
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