Abstract
Existing empirical evidence suggests that the Uncovered Interest Rate Parity condition may not hold due to an exchange risk premium. For a panel dataset of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in advanced countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.
Original language | English |
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Pages (from-to) | s71-s85 |
Journal | Bulletin of Economic Research |
Volume | 64 |
Issue number | SUPPL.1 |
DOIs | |
Publication status | Published - 2012 Dec |
Externally published | Yes |
Keywords
- Common factors
- Emerging economies
- Exchange risk premiums
- Uncovered interest rate parity
ASJC Scopus subject areas
- Economics and Econometrics