An arbitrage-free Nelson-Siegel term structure model with stochastic volatility for the determination of currency risk premia

Sarah Mouabbi

Working papers from Banque de France

Abstract: This paper uses a risk-averse formulation of the uncovered interest rate parity to determine exchange rates through interest rate differentials, and ultimately extract currency risk premia. The method proposed consists of developing an affine Arbitrage-Free class of dynamic Nelson-Siegel term structure models with stochastic volatility to obtain the domestic and foreign discount rate variations, which in turn are used to derive a representation of exchange rate depreciations. No-arbitrage restrictions allow to endogenously capturing currency risk premia. Empirical findings suggest that estimated currency risk premia are able to account for the forward premium puzzle and their properties are examined.

Keywords: term structure of interest rates; affine; exchange rates; risk premia. (search for similar items in EconPapers)
JEL-codes: E43 F31 G15 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2014
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://publications.banque-france.fr/sites/defaul ... g-paper_527_2014.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:527

Access Statistics for this paper

More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().