Uncovered Interest-rate Parity and Risk Premium: Evidence from EUR/RSD Exchange Rate
Eastern European Economics, 2021, vol. 59, issue 3, 271-294
This paper examines the uncovered interest-rate parity in a developing economy that implements inflation targeting. We study the exchange rate between the Euro and Serbian Dinar over different time horizons. We apply APARCH-in-mean to measure the impact and nature of a time-varying risk premium and capture the influence of higher-order moments on expected currency returns. We find a significant positive association between the returns and the interest-rate differential over shorter horizons when the risk premium is included. Asymmetries and fat tails are essential in explaining average returns over time horizons of up to one month.
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Persistent link: https://EconPapers.repec.org/RePEc:mes:eaeuec:v:59:y:2021:i:3:p:271-294
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