Expectations and the black market premium for foreign currency in Greece

Panayiotis Diamandis, Georgios Kouretas and Leonidas Zarangas

Applied Financial Economics, 2005, vol. 15, issue 10, 667-677

Abstract: In this paper an attempt is made to provide an understanding of the black market premium. To this end the operation of the parallel or black market for US dollars in Greece during the recent float is investigated. A series of tests is employed in order to examine the role of changes in agents' expectations about the official exchange rate in determining the black market premium. To test the impact of anticipated and unanticipated shocks to the official exchange rate on the black market premium, the two-step procedure recommended by Barro (1977) and modified by Hoffman et al. (1994) is employed. The main finding of this analysis is that expectations of devaluation cause movements in the black market premium for Greece and this result suggest that portfolio balance models may be appropriate for understanding the behaviour of the black market premium in Greece.

Date: 2005
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DOI: 10.1080/09603100500107842

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