tailieunhanh - Factors affecting the exchange rate risk premium

The objective of this work is to identify and examine the risk premium of the exchange rate; then, to determine the factors that cause it, and to measure its variance by using a GARCH-M model. Some theoretical models are developed by taking the exchange rate risk premium as dependent variable and other macrovariables, political events, and market conditions as independent ones. There are three different exchange rates ($/€, $/£, and ¥/$) used, here, for the measurement of the risk premium and the empirical test of the model. The empirical results show that the variances of our macro-variables, the policy variables (interest rates and money supply), the price of oil, the war in Iraq, the European debt crisis, and other factors have a significant effect on the risk premium. Also, the conditional variances of the stock markets risk premium are having a highly significant effect on the exchange rate risk premia. The empirical results show that the foreign exchange market is not very efficient and the monetary policy not very effective. | Journal of Applied Finance Banking vol. 6 no. 6 2016 33-55 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2016 Factors Affecting the Exchange Rate Risk Premium Dr. Ioannis N. Kallianiotis1 Abstract The objective of this work is to identify and examine the risk premium of the exchange rate then to determine the factors that cause it and to measure its variance by using a GARCH-M model. Some theoretical models are developed by taking the exchange rate risk premium as dependent variable and other macrovariables political events and market conditions as independent ones. There are three different exchange rates and used here for the measurement of the risk premium and the empirical test of the model. The empirical results show that the variances of our macro-variables the policy variables interest rates and money supply the price of oil the war in Iraq the European debt crisis and other factors have a significant effect on the risk premium. Also the conditional variances of the stock markets risk premium are having a highly significant effect on the exchange rate risk premia. The empirical results show that the foreign exchange market is not very efficient and the monetary policy not very effective. JEL classification numbers C13 C22 C53 F31 F41 F42 G14 Keywords Estimation Time-Series Models Forecasting and Other Model Applications Foreign Exchange Risk Time-Varying Risk Premium Open Economy Macroeconomics International Policy Coordination Information and Market Efficiency Event Studies 1 Introduction The exchange rates do not have a constant mean and exhibit phases of relative tranquility followed by periods of high volatility no constant variance .2 We want 1 Economics Finance Department The Arthur J. Kania School of Management University of Scranton Scranton PA 18510-4602 . 2 If the variance of a stochastic variable is not constant E s CT2 it is called heteroskedastic. Article Info Received July 11 2016. Revised August 2 2016. Published online .