Common and idiosyncratic factors of the exchange risk premium in emerging European markets

Joseph Byrne and Jun Nagayasu

Working Papers from Business School - Economics, University of Glasgow

Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) elements and a common factor using a principal components approach. We present evidence of a stationary idiosyncratic component and nonstationary common factor. This result leads to the conclusion of a nonstationary risk premium for these countries and a violation of the UIRP in the long-run, which is in contrast to previous studies often documenting a stationary premium in developed 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.

Keywords: Uncovered Interest Rate Parity; Emerging Economies; Exchange Risk Premiums; Common Factors (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2008-09
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.gla.ac.uk/media/media_96926_en.pdf (application/pdf)

Related works:
Working Paper: Common and Idiosyncratic Factors of the Exchange Risk Premium in Emerging European Markets (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2008_28

Access Statistics for this paper

More papers in Working Papers from Business School - Economics, University of Glasgow Contact information at EDIRC.
Bibliographic data for series maintained by Business School Research Team ().