Foreign Exchange Risk Premium Determinants: Case of Armenia

Tigran Poghosyan and Evžen Kočenda

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a model economy. The analysis is performed using weekly data on foreign and domestic currency deposits in the Armenian banking system. Results of the study indicate that contrary to the established view there is a positive correspondence between exchange rate depreciation and interest rate differentials. Further, it is shown that a systematic positive risk premium required by economic agents for foreign exchange transactions increases over the investment horizon. One-factor two-currency affine term structure framework applied in the paper is not sufficient to explain the driving forces behind the positive exchange rate risk premium. GARCH approach shows that central bank interventions and deposit volumes are two factors explaining time-varying exchange rate risk premium.

Keywords: “Forward premium” puzzle; exchange rate risk; time-varying risk premium; affine term structure models; GARCH-in-Mean; foreign and domestic deposits; transition and emerging markets; Armenia. (search for similar items in EconPapers)
JEL-codes: E43 E58 F31 G15 O16 P20 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-cwa, nep-fin, nep-ifn, nep-mac, nep-mon, nep-tra and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Modeling Foreign Exchange Risk Premium in Armenia (2008)
Working Paper: Foreign Exchange Risk Premium Determinants: Case of Armenia (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp297

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