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Exchange Rate Risk Premium: An Analysis of its Determinants for the Mexican Peso-USD

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  • Benavides Guillermo

Abstract

The objective of this paper is to analyze what are the main determinants of the exchange rate risk premium (ERP). The empirical case is conducted for the daily Mexican peso-USD exchange rate for a sample period from 2007 until 2015. According to the results the ERP is influenced by several financial variables which are the VIX, a carry trade index, the EMBI and the forward premium obtained from derivatives' transaction orders. These results are in line with previous results in the literature that have proven that exchange rate premiums are influenced by several financial variables, which are usually considered as 'proxies' of risk.

Suggested Citation

  • Benavides Guillermo, 2016. "Exchange Rate Risk Premium: An Analysis of its Determinants for the Mexican Peso-USD," Working Papers 2016-11, Banco de México.
    • Handle: RePEc:bdm:wpaper:2016-11
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    References listed on IDEAS

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    More about this item

    Keywords

    Mexican peso-USD Exchange Rate; Risk-Neutral Densities; Risk premiums;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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