Macroeconomic Sources of Foreign Exchange Risk in New EU Members

27 Pages Posted: 31 Jan 2008

See all articles by Evžen Kočenda

Evžen Kočenda

Charles University in Prague - Institute of Economic Studies; Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics; CESifo; University of Regensburg - Institute for East and Southeast European Studies; University of Michigan at Ann Arbor - The William Davidson Institute

Tigran Poghosyan

International Monetary Fund (IMF)

Date Written: October 2007

Abstract

We address the issue of foreign exchange risk and its macroeconomic determinants in several new EU members. The joint distribution of excess returns in the foreign exchange market and the observable macroeconomic factors is modeled using the stochastic discount factor (SDF) approach and a multivariate GARCH-in-mean model. We find that in post-transition economies real factors play a small role in determining foreign exchange risk, while nominal and monetary factors have a significant impact. Therefore, to contribute to the further stability of their domestic currencies, the central banks in the new EU member countries should continue stabilization policies aimed at achieving nominal convergence with the core EU members, as nominal factors play a crucial role in explaining the variability of the risk premium.

Keywords: foreign exchange risk, time-varying risk premium, stochastic discount factor,

JEL Classification: C22, F31, G15, P59

Suggested Citation

Kocenda, Evzen and Poghosyan, Tigran, Macroeconomic Sources of Foreign Exchange Risk in New EU Members (October 2007). William Davidson Institute Working Paper No. 898. Available at SSRN: https://ssrn.com/abstract=1088439 or http://dx.doi.org/10.2139/ssrn.1088439

Evzen Kocenda (Contact Author)

Charles University in Prague - Institute of Economic Studies ( email )

Opletalova St. 26
Prague, 11000
Czech Republic

HOME PAGE: http://kocenda.fsv.cuni.cz

Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

CESifo

Poschinger Str. 5
Munich, DE-81679
Germany

University of Regensburg - Institute for East and Southeast European Studies

Landshuterstr. 4
Regensburg, 93047
Germany

University of Michigan at Ann Arbor - The William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Tigran Poghosyan

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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