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Common Factors Of The Exchange Risk Premium In Emerging European Markets

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  • Joseph P. Byrne
  • Jun Nagayasu

Abstract

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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Suggested Citation

  • Joseph P. Byrne & Jun Nagayasu, 2012. "Common Factors Of The Exchange Risk Premium In Emerging European Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 64(Supplemen), pages 71-85, December.
    • Handle: RePEc:bla:buecrs:v:64:y:2012:i:s1:p:s71-s85
    DOI: j.1467-8586.2012.00447.x
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    File URL: http://hdl.handle.net/10.1111/j.1467-8586.2012.00447.x
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    Cited by:

    1. Nagayasu, Jun, 2013. "Co-movements in Real Effective Exchange Rates: Evidence from the Dynamic Hierarchical Factor Model," SIRE Discussion Papers 2013-66, Scottish Institute for Research in Economics (SIRE).
    2. Lorenzo Pozzi & Barbara Sadaba, 2017. "Detecting Scapegoat Effects in the Relationship Between Exchange Rates and Macroeconomic Fundamentals," Staff Working Papers 17-22, Bank of Canada.
    3. Nagayasu, Jun, 2012. "The Forward Premium Puzzle And Risk Premiums," MPRA Paper 42472, University Library of Munich, Germany.
    4. Mohsen Bahmani‐Oskooee & Tsangyao Chang & Zahra (Mila) Elmi & Omid Ranjbar, 2019. "Real Interest Rate Parity And Fourier Quantile Unit Root Test," Bulletin of Economic Research, Wiley Blackwell, vol. 71(3), pages 348-358, July.
    5. Bhatta, Guna Raj & Nepal, Rabindra & Harvie, Charles & Jayanthakumaran, Kankesu, 2022. "Testing for the uncovered interest parity condition in a small open economy: A state space modelling approach," Journal of Asian Economics, Elsevier, vol. 82(C).

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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