Common factors of the exchange risk premium in emerging European markets

Byrne, J.P. and Nagayasu, J. (2012) Common factors of the exchange risk premium in emerging European markets. Bulletin of Economic Research, 64(s1), s71-s85. (doi: 10.1111/j.1467-8586.2012.00447.x)

Abstract

Existing empirical evidence suggests that the Uncovered Interest Rate Parity condition may not hold due to an exchange risk premium. For a panel dataset 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 advanced 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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Byrne, Dr Joseph
• Authors: Byrne, J.P., and Nagayasu, J.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Bulletin of Economic Research
• ISSN: 0307-3378
• ISSN (Online): 1467-8586
• Published Online: 06 June 2012