Uncovered Interest-rate Parity and Risk Premium: Evidence from EUR/RSD Exchange Rate

Uncovered Interest-rate Parity and Risk Premium: Evidence from EUR/RSD Exchange Rate

This paper examines the uncovered interest-rate parity in a developing economy that implements inflation targeting. We study the exchange rate between the Euro and Serbian Dinar over different time horizons. We apply APARCH-in-mean to measure the impact and nature of a time-varying risk premium and...

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Veröffentlicht in:Eastern European economics 2021-05, Vol.59 (3), p.271-294
1. Verfasser: Božović, Miloš
Format: Artikel
Sprache:eng
Schlagworte:
Economic theory
Economics
exchange-rate fundamentals
Foreign exchange rates
Inflation
Interest rate parity theorem
Interest-rate differential
Risk
Risk premiums
time-varying premium
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creator Božović, Miloš
description This paper examines the uncovered interest-rate parity in a developing economy that implements inflation targeting. We study the exchange rate between the Euro and Serbian Dinar over different time horizons. We apply APARCH-in-mean to measure the impact and nature of a time-varying risk premium and capture the influence of higher-order moments on expected currency returns. We find a significant positive association between the returns and the interest-rate differential over shorter horizons when the risk premium is included. Asymmetries and fat tails are essential in explaining average returns over time horizons of up to one month.
doi_str_mv 10.1080/00128775.2020.1840275
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source PAIS Index; EBSCOhost Business Source Complete
subjects Economic theory
Economics
exchange-rate fundamentals
Foreign exchange rates
Inflation
Interest rate parity theorem
Interest-rate differential
Risk
Risk premiums
time-varying premium
title Uncovered Interest-rate Parity and Risk Premium: Evidence from EUR/RSD Exchange Rate
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