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Common Factors Of The Exchange Risk Premium In Emerging European Markets

  • Joseph P. Byrne
  • Jun Nagayasu

Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.

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File URL: http://hdl.handle.net/10.1111/j.1467-8586.2012.00447.x
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Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 64 (2012)
Issue (Month): Supplement 1 (December)
Pages: s71-s85

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Handle: RePEc:bla:buecrs:v:64:y:2012:i:s1:p:s71-s85
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