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Global financial risk and uncovered interest parity premia in Central and Eastern Europe

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  • Janus, Jakub

Abstract

This paper investigates the impact of global financial risk on uncovered interest parity (UIP) premia in four Central and Eastern European (CEE) economies. Building on recent advances in measuring global financial risk, the study employs local projections that incorporate external factors and local macroeconomic conditions. The results show that global risk-on/risk-off shocks have positive, economically significant, but temporary effects on UIP premia, typically following peak-and-trough patterns. The transmission of global risk to UIP premia is primarily driven by adjustments in exchange rates rather than shifts in interest rate differentials, with stronger responses observed for excess currency returns against the US dollar than the euro. Both the quantity of global risk (economic uncertainty) and its price (risk aversion) influence UIP premia, with the latter inducing more volatile responses. These findings underscore the role of financial market imperfections in shaping currency dynamics and their relevance for policies enhancing resilience to external shocks.

Suggested Citation

  • Janus, Jakub, 2025. "Global financial risk and uncovered interest parity premia in Central and Eastern Europe," Economic Modelling, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:ecmode:v:148:y:2025:i:c:s0264999325000732
    DOI: 10.1016/j.econmod.2025.107078
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    More about this item

    Keywords

    Global financial risk; Risk aversion; Uncovered interest parity; Currency excess returns; Exchange rates; Central and Eastern Europe;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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