Measuring the risk premium in uncovered interest parity using the component GARCH-M model

Dandan Li, Atanu Ghoshray, Bruce Morley

Research output: Contribution to journalArticle

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Abstract

The aim of this study is to analyze the potential risk premium inherent in the uncovered interest parity (UIP) condition. The component GARCH-in-mean model is used to measure the time-varying risk premium in UIP and separates the permanent and transitory risk. The results show that the risk premium is significant in most countries studied in this analysis. This suggests that risk is an important part of modeling exchange rates and needs to be considered in both empirical and theoretical models. In general, the results suggest emerging countries work better in terms of UIP and the risk premium than developed countries.
LanguageEnglish
Pages167-176
Number of pages10
JournalInternational Review of Economics & Finance
Volume24
DOIs
StatusPublished - Jun 2012

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Uncovered interest parity
GARCH-M model
Risk premium
Emerging countries
Exchange rates
Generalized autoregressive conditional heteroscedasticity
Time-varying risk premium
Developed countries
Empirical model
Modeling

Cite this

Measuring the risk premium in uncovered interest parity using the component GARCH-M model. / Li, Dandan; Ghoshray, Atanu; Morley, Bruce.

In: International Review of Economics & Finance, Vol. 24, 06.2012, p. 167-176.

Research output: Contribution to journalArticle

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