Modelling the Risk Premium in the Black-Market Zloty-Dollar Exchange Rate
AbstractThis paper tests for the presence of non-linear dependence in the black- market Polish zloty-dollar exchangeg rate. Using the GARCH-M model, we illustrate use of the Marquardt (1963) alternative to the Berndt, Hall and Hausman (1974) iterative nonlinear algorithm for estimation of such models, and discrimination between estimated models on the basis of the Brock and Potter (1993) test for conditional variance misspecification. We find evidence of a time-varying risk premium such that foreign speculators are compensated for increased exchange rate risk by depreciation which increases the dollar value of zloty holdings, and which is able to account for all of the apparent nonlinearity in the zloty.
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Bibliographic InfoPaper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9801.
Date of creation: Oct 1998
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Risk premium; GARCH-M model; black-market exchange rate;
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