Advanced Search
MyIDEAS: Login to save this paper or follow this series

Foreign Exchange Risk Premium Determinants: Case of Armenia

Contents:

Author Info

  • Tigran Poghosyan
  • Evzen Kocenda

Abstract

This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a model economy. The analysis is performed using weekly data on foreign and domestic currency deposits in the Armenian banking system. Results of the study indicate that contrary to the established view there is a positive correspondence between exchange rate depreciation and interest rate differentials. Further, it is shown that a systematic positive risk premium required by economic agents for foreign exchange transactions increases over the investment horizon. One-factor two-currency affine term structure framework applied in the paper is not sufficient to explain the driving forces behind the positive exchange rate risk premium. GARCH approach shows that central bank interventions and deposit volumes are two factors explaining time-varying exchange rate risk premium.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cerge-ei.cz/pdf/wp/Wp297.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp297.

as in new window
Length:
Date of creation: May 2006
Date of revision:
Handle: RePEc:cer:papers:wp297

Contact details of provider:
Postal: P.O. Box 882, Politickych veznu 7, 111 21 Praha 1
Phone: (+420) 224 005 123
Fax: (+420) 224 005 333
Email:
Web page: http://www.cerge-ei.cz
More information through EDIRC

Related research

Keywords: “Forward premium” puzzle; exchange rate risk; time-varying risk premium; affine term structure models; GARCH-in-Mean; foreign and domestic deposits; transition and emerging markets; Armenia.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Edgar L. Feige, 2003. "The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countries," Macroeconomics, EconWPA 0302005, EconWPA.
  2. Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(4), pages 471-488, August.
  3. Golinelli, Roberto & Rovelli, Riccardo, 2005. "Monetary policy transmission, interest rate rules and inflation targeting in three transition countries," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(1), pages 183-201, January.
  4. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1259-82, September.
  5. David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 279-304, 02.
  6. Robert P. Flood & Andrew K. Rose, 1994. "Fixes: Of The Forward Discount Puzzle," NBER Working Papers 4928, National Bureau of Economic Research, Inc.
  7. Kirikos, Dimitris G, 2002. "Discrete Policy Interventions and Rational Forecast Errors in Foreign Exchange Markets: The Uncovered Interest Parity Hypothesis Revisited," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(4), pages 327-38, October.
  8. Bill Francis & Iftekhar Hasan & Delroy Hunter, 2002. "Emerging market liberalization and the impact on uncovered interest rate parity," Working Paper, Federal Reserve Bank of Atlanta 2002-16, Federal Reserve Bank of Atlanta.
  9. Bennett T. McCallum, 1992. "A Reconsideration of the Uncovered Interest Parity Relationship," NBER Working Papers 4113, National Bureau of Economic Research, Inc.
  10. Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 115-144, June.
  11. Brennan, Michael J. & Schwartz, Eduardo S., 1979. "A continuous time approach to the pricing of bonds," Journal of Banking & Finance, Elsevier, Elsevier, vol. 3(2), pages 133-155, July.
  12. Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers, University of California at Berkeley 85, University of California at Berkeley.
  13. Peter N Smith & Michael R Wickens, . "Asset Pricing with Observable Stochastic Discount Factors," Discussion Papers, Department of Economics, University of York 02/03, Department of Economics, University of York.
  14. Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(3), pages 179-92, Summer.
  15. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  16. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 627-627, November.
  17. Chiona Balfoussia & Michael Wickens, 2004. "Macroeconomic Sources of Risk in the Term Structure," CESifo Working Paper Series 1329, CESifo Group Munich.
  18. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, American Finance Association, vol. 47(3), pages 1209-27, July.
  19. Orlowski, Lucjan T., 2004. "Exchange rate risk and convergence to the Euro," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 25-2004, ZEI - Center for European Integration Studies, University of Bonn.
  20. Smith, Peter N & Wickens, Michael R, 2002. "Macroeconomic Sources of FOREX Risk," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3148, C.E.P.R. Discussion Papers.
  21. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 33(1), pages 13-47, March.
  22. Chinn, Menzie D., 2006. "The (partial) rehabilitation of interest rate parity in the floating rate era: Longer horizons, alternative expectations, and emerging markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(1), pages 7-21, February.
  23. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(2), pages 325-38, April.
  24. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(4), pages 745-70, August.
  25. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cer:papers:wp297. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jana Koudelkova).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.