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A Risk-Driven Approach to Exchange-Rate Modelling

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  • Piotr Keblowski

    ()
    (University of Lodz, Poland)

  • Aleksander Welfe

    ()
    (University of Lodz, Poland)

Abstract

The paper presents a new approach to exchange rate modelling that augments the CHEER model with a sovereign credit default risk as perceived by financial investors making their decisions. In the cointegrated VAR system with nine variables comprised of the short- and long-term interest rates in Poland and the euro area, inflation rates, CDS indices and the zloty/euro exchange rate, four long-run relationships were found. Two of them link term spreads with inflation rates, the third one describes the exchange rate and the fourth one explains the inflation rate in Poland. Transmission of shocks was analysed by common stochastic trends. The estimation results were used to calculate the zloty/euro equilibrium exchange rate.Length: 25 pages

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Bibliographic Info

Paper provided by Department of Applied Econometrics, Warsaw School of Economics in its series Working Papers with number 57.

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Date of creation: 30 Sep 2011
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Handle: RePEc:wse:wpaper:57

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Keywords: exchange rate modelling; sovereign credit default risk; CDS spread; international parities; equilibrium exchange rate;

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References

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  1. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  2. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
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  6. Keblowski, Piotr & Welfe, Aleksander, 2010. "Estimation of the equilibrium exchange rate: The CHEER approach," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1385-1397, November.
  7. Jurgen A Doornik & Henrik Hansen, . "An omnibus test for univariate and multivariate normalit," Economics Papers W4&91., Economics Group, Nuffield College, University of Oxford.
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Cited by:
  1. Rashid, Abdul & Saedan, Mashael, 2013. "Financial Crisis and Exchange Rates in Emerging Economics: An Empirical Analysis using PPP-UIP-Framework," MPRA Paper 49832, University Library of Munich, Germany.
  2. Piotr Kębłowski, 2011. "The Behaviour of Exchange Rates in the Central European Countries and Credit Default Risk Premiums," Central European Journal of Economic Modelling and Econometrics, CEJEME, vol. 3(4), pages 221-236, December.

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