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The Forward-Discount Puzzle in Central and Eastern Europe

Author

Listed:
  • Rob Hayward

    (University of Brighton Business School)

  • Jens Hölscher

    (Bournemouth University)

Abstract

This paper adds to evidence that the forward-discount puzzle is at least in part explained as a compensation for taking crash risk. A number of Central and Eastern European exchange rates are compared. A hidden Markov model is used to identify two regimes for most of the exchange rates. These two regimes can be characterised as being either periods of calm or periods of crisis The level of international risk aversion and changes in US interest rates affect the probability of switching from one regime to the other. This model is then used to assess the way that these two factors affect the probability of a currency crisis. While the Czech Republic, Hungary and Bulgaria are very sensitive to international financial conditions, Poland and Romania are relatively immune.

Suggested Citation

  • Rob Hayward & Jens Hölscher, 2017. "The Forward-Discount Puzzle in Central and Eastern Europe," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(4), pages 472-497, December.
    • Handle: RePEc:pal:compes:v:59:y:2017:i:4:d:10.1057_s41294-017-0033-5
    DOI: 10.1057/s41294-017-0033-5
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    References listed on IDEAS

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