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.
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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
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“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-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)
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