Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market

Vít Pošta

Prague Economic Papers, 2012, vol. 2012, issue 1, 3-17

Abstract: The paper presents both the theoretical account of the issue of foreign exchange risk premium and the actual estimates of the time-varying risk premium for the cases of the Czech koruna to euro and US dollar. The risk premium is modelled within a state space framework and estimated using the Kalman filtering procedure. Some financial market fundamentals are used to estimate the risk premium, and thus not only do the estimates give insight into the foreign exchange market behaviour but also into some linkages between the various segments of the financial market as a whole.

Keywords: Kalman filter; financial market; foreign exchange risk premium; interest rate parity (search for similar items in EconPapers)
JEL-codes: E44 E47 F31 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.18267/j.pep.407

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