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Time-Varying Exchange Rate Risk Premium

Author

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  • D.M.Nguyen, Anh
  • Dai Hung, Ly

Abstract

We characterize the exchange rate risk premium on the context of a small open economy with controlled floating exchange rate regime. The data set includes 100 observations on case of Vietnam over 01/2011-04/2019. The risk premium is varying over time. And it is determined by output growth rate, inflation rate, foreign capital inflows and liquidity supply. As one application, the existence of time varying risk premium reduces the effectiveness of foreign exchange market intervention by forward contract.

Suggested Citation

  • D.M.Nguyen, Anh & Dai Hung, Ly, 2019. "Time-Varying Exchange Rate Risk Premium," MPRA Paper 94600, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:94600
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    File URL: https://mpra.ub.uni-muenchen.de/94600/1/MPRA_paper_94600.pdf
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    References listed on IDEAS

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    1. Roberto Chang, 2019. "Foreign Exchange Intervention Redux," Central Banking, Analysis, and Economic Policies Book Series, in: Álvaro Aguirre & Markus Brunnermeier & Diego Saravia (ed.),Monetary Policy and Financial Stability: Transmission Mechanisms and Policy Implications, edition 1, volume 26, chapter 7, pages 205-247, Central Bank of Chile.
    2. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 453-522, Elsevier.
    3. Antonello D'Agostino & Luca Gambetti & Domenico Giannone, 2013. "Macroeconomic forecasting and structural change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 82-101, January.
    4. Timothy Cogley & Thomas J. Sargent, 2002. "Evolving Post-World War II US Inflation Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 331-388, National Bureau of Economic Research, Inc.
    5. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    6. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
    7. Charles Engel, 2016. "Exchange Rates, Interest Rates, and the Risk Premium," American Economic Review, American Economic Association, vol. 106(2), pages 436-474, February.
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    Cited by:

    1. Gouhari, Saeeda & Forrest, Alan & Roberts, Michaela, 2021. "Cost-effectiveness analysis of forest ecosystem services in mountain areas in Afghanistan," Land Use Policy, Elsevier, vol. 108(C).

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    More about this item

    Keywords

    Exchange Rate Premium; Foreign Exchange Intervention; Forward Contract;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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