IDEAS home Printed from https://ideas.repec.org/a/spt/apfiba/v6y2016i6f6_6_3.html
   My bibliography  Save this article

Factors Affecting the Exchange Rate Risk Premium

Author

Listed:
  • Ioannis N. Kallianiotis

Abstract

The objective of this work is to identify and examine the risk premium of the exchange rate; then, to determine the factors that cause it, and to measure its variance by using a GARCH-M model. Some theoretical models are developed by taking the exchange rate risk premium as dependent variable and other macrovariables, political events, and market conditions as independent ones. There are three different exchange rates ($/€, $/£, and ¥/$) used, here, for the measurement of the risk premium and the empirical test of the model. The empirical results show that the variances of our macro-variables, the policy variables (interest rates and money supply), the price of oil, the war in Iraq, the European debt crisis, and other factors have a significant effect on the risk premium. Also, the conditional variances of the stock markets risk premium are having a highly significant effect on the exchange rate risk premia. The empirical results show that the foreign exchange market is not very efficient and the monetary policy not very effective.

Suggested Citation

  • Ioannis N. Kallianiotis, 2016. "Factors Affecting the Exchange Rate Risk Premium," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 6(6), pages 1-3.
  • Handle: RePEc:spt:apfiba:v:6:y:2016:i:6:f:6_6_3
    as

    Download full text from publisher

    File URL: http://www.scienpress.com/Upload/JAFB%2fVol%206_6_3.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Engel, Charles, 1992. "On the foreign exchange risk premium in a general equilibrium model," Journal of International Economics, Elsevier, vol. 32(3-4), pages 305-319, May.
    2. Della Corte, Pasquale & Ramadorai, Tarun & Sarno, Lucio, 2016. "Volatility risk premia and exchange rate predictability," Journal of Financial Economics, Elsevier, vol. 120(1), pages 21-40.
    3. Frankel, Jeffrey A & Chinn, Menzie D, 1993. "Exchange Rate Expectations and the Risk Premium: Tests for a Cross Section of 17 Currencies," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 136-144, June.
    4. Adrien Verdelhan, 2010. "A Habit‐Based Explanation of the Exchange Rate Risk Premium," Journal of Finance, American Finance Association, vol. 65(1), pages 123-146, February.
    5. Rajnish Mehra, 2012. "Consumption-Based Asset Pricing Models," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 385-409, October.
    6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    7. P N Smith & S Sorensen & M R Wickens, "undated". "Macroeconomic Sources of Equity Risk," Discussion Papers 03/13, Department of Economics, University of York.
    8. Poghosyan Tigran, 2012. "Determinants of the Foreign Exchange Risk Premium in the Gulf Cooperation Council Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 7(3), pages 1-26, May.
    9. Hakkio, Craig S & Sibert, Anne, 1995. "The Foreign Exchange Risk Premium: Is It Real?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 301-317, May.
    10. Chiang, Thomas C., 1991. "International asset pricing and equity market risk," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 349-364, September.
    11. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    12. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
    13. John A. Carlson & Carol L. Osler, 1999. "Determinants of current risk premiums," Staff Reports 70, Federal Reserve Bank of New York.
    14. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:spt:apfiba:v::y:2018:i::f:8_2_5 is not listed on IDEAS
    2. repec:spt:apfiba:v:8:y:2018:i:2:f:8_2_5 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spt:apfiba:v:6:y:2016:i:6:f:6_6_3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Eleftherios Spyromitros-Xioufis). General contact details of provider: http://www.scienpress.com/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.