Premium
COMMON FACTORS OF THE EXCHANGE RISK PREMIUM IN EMERGING EUROPEAN MARKETS
Author(s) -
Byrne Joseph P.,
Nagayasu Jun
Publication year - 2012
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.1467-8586.2012.00447.x
Subject(s) - risk premium , economics , interest rate parity , emerging markets , financial economics , systematic risk , exchange rate , empirical evidence , liquidity premium , monetary economics , econometrics , macroeconomics , philosophy , epistemology , market liquidity , liquidity crisis
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.