The Three Sources of Risk Premia in Ukrainian Inter-Bank Markets

Abstract:     
Despite its adoption of a nominal-anchor exchange-rate policy during the period 1999-2005, Ukrainian financial markets were subject to substantial premia in interest rates on inter-bank markets relative to what is observed in Euro credit markets. In this paper I demonstrate that there were three sources of this risk premium, and that these sources had different causes. Estimation using weekly data over the period 1999-2005 illustrates that the government's nominal anchor policy vis a vis the US dollar was effective at eliminating the risk of currency depreciation. However, other risks of convertibility and liquidity were either not addressed or exacerbated. Future monetary and financial-sector policy should be calibrated to address all three to avoid the financial crises that have affected other emerging economies.

Number of Pages in PDF File: 36

Keywords: Ukraine, risk, risk premium, interbank credit

JEL Classification: E43, F31, F36

working papers series