Analysing Currency Risk Premia in the Czech Republic, Hungary, Poland and Slovakia

The paper estimates currency risk premia for the Czech Republic, Hungary, Poland and Slovakia. Three different approaches are applied: a constant premium approach based on rational expectations, while time-varying premia are estimated with a method using financial market analysts¿ surveys and also with a Kalman filter technique. A novelty in this paper is a crosscheck based on the three different approaches applied and also making use of implied and historical volatilities. The results highlight the importance of such a crosscheck: in the case of the Czech and the Slovak koruna and the Polish zloty this exercise reveals severe problems with the results, which otherwise would not have been discovered. On the other hand, the estimation methods produce convincing results for the Hungarian forint. The estimated Hungarian premium series reflect the major events that intuitively may have shaped currency risk in the country. A possible reason for these findings is a high signal-to-noise ratio in the case of the Hungarian case where the risk premium has been large and exhibited substantial shifts through time.

REZESSY Andras; 

2008-11-20

Centre for International Banking Economics & Finance, Liverpool John Moores University

JRC48802

http://www.ffm-conference.com/index2.php?option=com_docman&task=doc_view&gid=6&Itemid=77,    https://publications.jrc.ec.europa.eu/repository/handle/JRC48802,