Foreign Exchange Risk Premium Determinants: Case of Armenia
AbstractThis paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a single country context. The analysis is performed using weekly data on foreign and domestic currency deposits in Armenian banking system. The paper provides the results of the simple tests of uncovered interest parity condition, which indicate that contrary to established view dominating in empirical literature there is a positive correspondence between exchange rate depreciation and interest rate differentials in Armenian deposit market. Furthermore, the paper presents and discusses a systematic positive risk premium required by the economic agents for foreign exchange transactions, which increases over the investment horizon. The two currency affine term structure framework is applied to identify the factors driving the systematic exchange rate risk premium in Armenia. At the end, possible directions for further research are outlined.
Download InfoIf 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.
Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp811.
Date of creation: 01 Feb 2006
Date of revision:
Contact details of provider:
Postal: 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109
Phone: 734 763-5020
Fax: 734 763 5850
Web page: http://www.wdi.umich.edu
More information through EDIRC
“forward discount” puzzle; exchange rate risk; affine term structure models; foreign and domestic deposits; transition and emerging markets; Armenia;
Other versions of this item:
- Tigran Poghosyan & Evzen Kocenda, 2006. "Foreign Exchange Risk Premium Determinants: Case of Armenia," CERGE-EI Working Papers wp297, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-02 (All new papers)
- NEP-CWA-2006-07-02 (Central & Western Asia)
- NEP-FIN-2006-07-02 (Finance)
- NEP-FMK-2006-07-02 (Financial Markets)
- NEP-IFN-2006-07-02 (International Finance)
- NEP-MAC-2006-07-02 (Macroeconomics)
- NEP-TRA-2006-07-02 (Transition Economics)
- NEP-UPT-2006-07-02 (Utility Models & Prospect Theory)
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.:
- Bennett T. McCallum, 1992.
"A Reconsideration of the Uncovered Interest Parity Relationship,"
NBER Working Papers
4113, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
- Mike R Wickens & Peter N Smith, .
"Macroeconmic Sources of FOREX Risk,"
01/13, Department of Economics, University of York.
- Hiona Balfoussia & Mike Wickens, 2007.
"Macroeconomic Sources of Risk in the Term Structure,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 39(1), pages 205-236, 02.
- Chiona Balfoussia & Michael Wickens, 2004. "Macroeconomic Sources of Risk in the Term Structure," CESifo Working Paper Series 1329, CESifo Group Munich.
- Michael R. Wickens & Chiona Balfoussia, 2004. "Macroeconomic Sources of Risk in the Term Structure," CEIS Research Paper 61, Tor Vergata University, CEIS.
- Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 471-488, August.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- Flood, Robert P & Rose, Andrew K, 1996.
"Fixes: Of the Forward Discount Puzzle,"
The Review of Economics and Statistics,
MIT Press, vol. 78(4), pages 748-52, November.
- Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August.
- Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers 85, University of California at Berkeley.
- Roberto Golinelli & Riccardo Rovelli, 2002.
"Monetary Policy Transmission, Interest Rate Rules and Inflation Targeting in Three Transition Countries,"
Eastward Enlargement of the Euro-zone Working Papers
wp10, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Aug 2002.
- Golinelli, Roberto & Rovelli, Riccardo, 2005. "Monetary policy transmission, interest rate rules and inflation targeting in three transition countries," Journal of Banking & Finance, Elsevier, vol. 29(1), pages 183-201, January.
- Bansal, Ravi & Dahlquist, Magnus, 1999.
"The Forward Premium Puzzle: Different Tales from Developed and Emerging Economies,"
CEPR Discussion Papers
2169, C.E.P.R. Discussion Papers.
- Bansal, Ravi & Dahlquist, Magnus, 2000. "The forward premium puzzle: different tales from developed and emerging economies," Journal of International Economics, Elsevier, vol. 51(1), pages 115-144, June.
- Peter N Smith & Michael R Wickens, .
"Asset Pricing with Observable Stochastic Discount Factors,"
02/03, Department of Economics, University of York.
- Smith, Peter & Wickens, Michael, 2002. " Asset Pricing with Observable Stochastic Discount Factors," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 397-446, July.
- Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
- 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., vol. 7(4), pages 327-38, October.
- 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, vol. 25(1), pages 7-21, February.
- Brennan, Michael J. & Schwartz, Eduardo S., 1979. "A continuous time approach to the pricing of bonds," Journal of Banking & Finance, Elsevier, vol. 3(2), pages 133-155, July.
- Edgar L. Feige, 2003.
"The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countrieses,"
- Feige,E.L., 2003. "The dynamics of currency substitution, asset substitution and de facto dollarization and euroization in transition countries," Working papers 3, Wisconsin Madison - Social Systems.
- Edgar L. Feige, 2003. "The Dynamics of Currency Substitution, Asset Substitution and De facto Dollarization and Euroization in Transition Countries," Macroeconomics 0302005, EconWPA.
- Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
- Bill Francis & Iftekhar Hasan & Delroy Hunter, 2002.
"Emerging market liberalization and the impact on uncovered interest rate parity,"
2002-16, Federal Reserve Bank of Atlanta.
- Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M., 2002. "Emerging market liberalization and the impact on uncovered interest rate parity," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 931-956, November.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- 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, vol. 47(4), pages 1259-82, September.
- Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April.
- Orlowski, Lucjan T., 2004.
"Exchange rate risk and convergence to the Euro,"
ZEI Working Papers
B 25-2004, ZEI - Center for European Integration Studies, University of Bonn.
- Chan, K C, et al, 1992.
" An Empirical Comparison of Alternative Models of the Short-Term Interest Rate,"
Journal of Finance,
American Finance Association, vol. 47(3), pages 1209-27, July.
- Tom Doan, . "RATS programs to replicate CKLS(1992) estimation of interest rate models," Statistical Software Components RTZ00035, Boston College Department of Economics.
- Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
- David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, vol. 56(1), pages 279-304, 02.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laurie Gendron).
If references are entirely missing, you can add them using this form.