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Factors Affecting the Exchange Rate Risk Premium

Ioannis N. Kallianiotis
- 01 Jan 2016 - 
- Vol. 6, Iss: 6, pp 1-3
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TLDR
In this article, the authors identify and examine the risk premium of the exchange rate; then, determine the factors that cause it, and to measure its variance by using a GARCH-M model.
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.

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Citations
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Journal ArticleDOI

How Efficient is the Foreign Exchange Market

TL;DR: In this article, the degree of efficiency in the foreign exchange market by using four exchange rates was measured using different theoretical models, like the random walk hypothesis, unbiased forward rate hypothesis, composite efficiency hypothesis, the semi-strong market efficiency, and the exchange rate expectations based on anticipated and unanticipated events.
Posted Content

Exchange Rate Expectations

TL;DR: In this paper, the exchange rate expectations, which are broad models of exchange rate forecasting and efficiency, by looking at approaches, such as the static expectations, the extrapolative, the adaptive, the rational, the regressive, and some general specifications of the above expectations, are investigated.
Dissertation

Taylor rule estimation with the presence of a ZLB-period : how the inclusion of shadow rate affect the precision of Taylor rule estimation on the federal funds rate.

TL;DR: In this paper, the authors used the shadow rate to measure the effect of monetary policy in the United States from 1987 to 2015 using a Taylor rule and found that shadow rate can be used as a tool to analyze monetary policy using data with the presence of a zero lower bound.
References
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Book

Applied Econometric Time Series

Walter Enders
TL;DR: In this article, the authors present an alternative solution method for Deterministic Processes by iteratively solving homogeneous difference equation and finding particular solutions for deterministic processes, and conclude that the proposed solution is the best solution.
Journal ArticleDOI

Estimation of Time Varying Risk Premia in the Term Structure: the ARCH-M Model

TL;DR: In this paper, an extension of the ARCH model was proposed to allow the conditional variance to be a determinant of the mean and is called ARCH-M. The model explains and interprets the recent econometric failures of the expectations hypothesis of the term structure.
Journal ArticleDOI

Exchange Rates, Interest Rates, and the Risk Premium

TL;DR: The uncovered interest parity puzzle as mentioned in this paper concerns the empirical regularity that high interest rate countries tend to have high expected returns on short term deposits, and a separate puzzle is that high real interest rate country tends to have currencies that are stronger than can be accounted for by the path of expected real interest differentials under uncovering interest parity, which has apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials.
Journal ArticleDOI

Interest rates and risk premia in the stock market and in the foreign exchange market

TL;DR: In this paper, the authors show that increases in interest rates are associated with predictable increases in the volatility of returns in both markets, and that expected returns both in the stock market and in the foreign exchange market are negatively correlated with nominal interest rates.
Journal ArticleDOI

Volatility Risk Premia and Exchange Rate Predictability

TL;DR: In this article, the authors discover a new currency strategy with highly desirable return and diversification properties, which uses the predictive capability of currency volatility risk premia for currency returns, and the strategy carries a large weight in a minimum-variance portfolio of commonly employed currency strategies.
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