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Macroeconomic Factors and the Balanced Value of the Czech Koruna/Euro Exchange Rate (in English)

  • Jan Brùha

    ()

    (Czech National Bank, Prague)

  • Alexis Derviz

    ()

    (Czech National Bank, Charles University, and the Institute of Information Theory and Automation, Prague)

The authors study the dependence of the Czech koruna’s exchange rate to the euro on risk factors that cannot be reduced to standard macroeconomic fundamentals. For this purpose, they construct an international asset-pricing model in which the exchange rate is codetermined by a risk factor imperfectly correlated with other priced risks in the economy. The model embeds the standard no-arbitrage setup. It also contains an additional equation that links the autarchic currency price with the foreign-exchange order flow. In the state-space form, the unobserved variables that determine the dynamics of the asset markets, the autarchic exchange rate, and the FX order flow span a number of macroeconomic and latent risk factors. The model for the Czech koruna/euro exchange rate uses Kalman filter techniques. The results indicate the existence of a “non-fundamental” source of systematic divergence between the observed and the autarchic (i.e. fundamental) FX returns.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 56 (2006)
Issue (Month): 7-8 (July)
Pages: 318-343

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Handle: RePEc:fau:fauart:v:56:y:2006:i:7-8:p:318-343
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  1. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
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  14. Derviz, Alexis, 2004. "Asset return dynamics and the FX risk premium in a decentralized dealer market," European Economic Review, Elsevier, vol. 48(4), pages 747-784, August.
  15. Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
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