A Risk-Driven Approach to Exchange-Rate Modelling

Piotr Keblowski () and Aleksander Welfe
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Piotr Keblowski: University of Lodz, Poland

No 57, Working Papers from Department of Applied Econometrics, Warsaw School of Economics

Abstract: The paper presents a new approach to exchange rate modelling that augments the CHEER model with a sovereign credit default risk as perceived by financial investors making their decisions. In the cointegrated VAR system with nine variables comprised of the short- and long-term interest rates in Poland and the euro area, inflation rates, CDS indices and the zloty/euro exchange rate, four long-run relationships were found. Two of them link term spreads with inflation rates, the third one describes the exchange rate and the fourth one explains the inflation rate in Poland. Transmission of shocks was analysed by common stochastic trends. The estimation results were used to calculate the zloty/euro equilibrium exchange rate.Length: 25 pages

Keywords: exchange rate modelling; sovereign credit default risk; CDS spread; international parities; equilibrium exchange rate (search for similar items in EconPapers)
JEL-codes: C32 E31 E43 (search for similar items in EconPapers)
Date: 2011-09-30
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-tra
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Related works:
Journal Article: A risk-driven approach to exchange rate modelling (2012)
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