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

Author Info

Listed author(s):
  • Jan Brùha

    ()

    (Czech National Bank, Prague)

  • Alexis Derviz

    ()

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

Abstract

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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Keywords: exchange rate; latent risk; order flow; pricing kernel; state space;

Find related papers by JEL classification:

  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

References listed on IDEAS
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  1. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February.
  2. 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.
  3. Pierre-Olivier Gourinchas & Aaron Tornell, 2000. "Exchange Rate Dynamics, Learning and Misperception," Econometric Society World Congress 2000 Contributed Papers 0795, Econometric Society.
  4. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
  5. Gourieroux,Christian & Monfort,Alain, 1995. "Statistics and Econometric Models," Cambridge Books, Cambridge University Press, number 9780521471626, September.
  6. Jackwerth, Jens Carsten, 2000. "Recovering Risk Aversion from Option Prices and Realized Returns," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 433-451.
  7. Smith, Peter N & Wickens, Michael R., 2002. "Macroeconomic Sources of FOREX Risk," CEPR Discussion Papers 3148, C.E.P.R. Discussion Papers.
  8. Derviz, Alexis, 2004. "Exchange rate risks and asset prices in a small open economy," Working Paper Series 314, European Central Bank.
  9. He, Hua & Modest, David M, 1995. "Market Frictions and Consumption-Based Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 94-117, February.
  10. Rosenberg, Joshua V. & Engle, Robert F., 2002. "Empirical pricing kernels," Journal of Financial Economics, Elsevier, vol. 64(3), pages 341-372, June.
  11. Flavin, T. J. & Wickens, M. R., 2003. "Macroeconomic influences on optimal asset allocation," Review of Financial Economics, Elsevier, vol. 12(2), pages 207-231.
  12. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  13. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
  14. Hall, Alastair R., 2004. "Generalized Method of Moments," OUP Catalogue, Oxford University Press, number 9780198775201.
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Cited by:

  1. Luboš Komárek & Martin Motl, 2012. "Behaviorální a fundamentální rovnovážný měnový kurz české koruny
    [Behavioural and Fundamental Equilibrium Exchange Rate of the Czech Koruna]    ," Politická ekonomie, University of Economics, Prague, vol. 2012(2), pages 147-166.

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