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Exchange Rate Volatility and Uncovered Interest Rate Parity in the European Emerging Economies

Author

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  • Dejan Živkov
  • Jovan Njegić
  • Mirela Momčilović
  • Ivan Milenković

Abstract

This paper investigates whether UIRP principle holds and what is predominant driving force, which influences exchange rate movement - economic fundamentals or short-term speculative behaviour. Analysis covers seven East European transition countries and empirical data comprise weekly time series ranging from first week in January 2003 to last week in December 2013. The research method is Component-GARCH in Mean Model, which decomposes temporary and permanent element of volatility. The mean and variance equations have been adjusted for the structural breaks' presence in order to improve estimated parameters. The results suggested that UIRP principle does not hold in any country. After structural breaks inclusion, we have found that the permanent effect is significant in determination of exchange rate dynamics in five countries, but it does not apply for the transition effect. However, further outliers' purification revealed that only in Serbia short-term transition component plays an important role.

Suggested Citation

  • Dejan Živkov & Jovan Njegić & Mirela Momčilović & Ivan Milenković, 2016. "Exchange Rate Volatility and Uncovered Interest Rate Parity in the European Emerging Economies," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(3), pages 253-270.
    • Handle: RePEc:prg:jnlpep:v:2016:y:2016:i:3:id:562:p:253-270
    DOI: 10.18267/j.pep.562
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    More about this item

    Keywords

    uncovered interest rate parity; structural breaks; East European countries; CGARCH-M; carry-trade strategy;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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