Common factors of the exchange risk premium in emerging european markets

Joseph P. Byrne, Jun Nagayasu

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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 languageEnglish
Pages (from-to)s71-s85
JournalBulletin of Economic Research
Volume64
Issue numberSUPPL.1
DOIs
Publication statusPublished - 2012 Dec
Externally publishedYes

Keywords

  • Common factors
  • Emerging economies
  • Exchange risk premiums
  • Uncovered interest rate parity

ASJC Scopus subject areas

  • Economics and Econometrics

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