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Exchange Rate Risk in Central European Countries

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Abstract

The authors address the issue of foreign exchange risk and its macroeconomic determinants in several Central European (CE) economies. The joint distribution of excess returns in the foreign exchange market and observable country-specific macroeconomic factors is modeled using the stochastic discount factor (SDF) approach and a multivariate GARCH-in-mean model. The authors find that real factors seem to lack significance in determining foreign exchange risk, while nominal factors (inflation and money) have a significant impact. The differences in the impact of nominal factors are related to the actual monetary policy regimes adopted in the countries examined. The authors´ findings have policy implications with respect to currency stability. The central banks in the CE countries should continue stabilization policies aimed at achieving nominal convergence with the core EU members, as nominal country-specific factors play a crucial role in explaining the variability of the risk premium.

Suggested Citation

  • Evžen Koèenda & Tigran Poghosyan, 2010. "Exchange Rate Risk in Central European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 22-39, February.
  • Handle: RePEc:fau:fauart:v:60:y:2010:i:1:p:22-39
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Vit Posta, 2012. "Time-Varying Risk Premium in the Czech Capital Market: Did the Market Experience a Structural Shock in 2008–2009?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(5), pages 450-470, November.
    2. Bernard Walley, 2015. "Macroeconomic sources of foreign exchange risk premium: evidence from South Africa," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 382-395, April.
    3. repec:fau:fauart:v:67:y:2017:i:3:p:199-220 is not listed on IDEAS
    4. Vít Pošta, 2012. "Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market," Prague Economic Papers, University of Economics, Prague, vol. 2012(1), pages 3-17.

    More about this item

    Keywords

    foreign exchange risk; time-varying risk premium; stochastic discount factor; multivariate GARCH-in-mean;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • P59 - Economic Systems - - Comparative Economic Systems - - - Other

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