Foreign exchange risk premia: from traditional to state-space analyses

Siwat Nakmai

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines foreign exchange risk premia from simple univariate regressions to the state-space method. The adjusted traditional regressions properly figure out the existence and time-evolving property of the risk premia. Successively, the state-space estimations overall are quite rationally competent in examining the essence of time variability of the unobservable risk premia. To be more precise, the coefficients on the lagged estimated time-series are significant and the disturbance combined from the observation and transition equations in the state-space system, rational and premium errors, respectively, is statistically white noise. Such the two residuals are discovered to move oppositely with their covariance approaching zero suggested by the empirics. Besides, foreign exchange risk premia are projected and found significantly stationary at level and relatively volatile throughout time with some clustering. This volatility is however not quite dominant in the deviations of forward prediction errors.

Keywords: foreign exchange risk premia; univariate regressions; state-space modeling; Kalman filter (search for similar items in EconPapers)
JEL-codes: C20 C32 F31 (search for similar items in EconPapers)
Date: 2016-04-15
New Economics Papers: this item is included in nep-rmg
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Related works:
Working Paper: Foreign exchange risk premia: from traditional to state-space analyses (2016)
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