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Common factors of the exchange risk premium in emerging European markets

Joseph Byrne and Jun Nagayasu

MPRA Paper from University Library of Munich, Germany

Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.

Keywords: Uncovered Interest Rate Parity; Emerging Economies; Exchange Risk Premiums; Common Factors (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2011-05
New Economics Papers: this item is included in nep-eec, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: COMMON FACTORS OF THE EXCHANGE RISK PREMIUM IN EMERGING EUROPEAN MARKETS (2012) Downloads
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