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

Dandan Li; Atanu Ghoshray; Bruce Morley

doi:10.1016/j.iref.2012.02.001

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

Dandan Li
, Atanu Ghoshray
, Bruce Morley

Department of Economics

Research output: Contribution to journal › Article › peer-review

38 Citations (SciVal)

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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.

Original language	English
Pages (from-to)	167-176
Number of pages	10
Journal	International Review of Economics & Finance
Volume	24
DOIs	https://doi.org/10.1016/j.iref.2012.02.001
Publication status	Published - Jun 2012

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Morley_IREF_2012.pdf
NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Economics & Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Economics & Finance, vol 24, 2012, DOI 10.1016/j.iref.2012.02.001
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Cite this

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title = "Measuring the risk premium in uncovered interest parity using the component GARCH-M model",

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.",

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AB - 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.

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ER -

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

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