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Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market

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  • Vít Pošta

Abstract

The paper presents both the theoretical account of the issue of foreign exchange risk premium and the actual estimates of the time-varying risk premium for the cases of the Czech koruna to euro and US dollar. The risk premium is modelled within a state space framework and estimated using the Kalman filtering procedure. Some financial market fundamentals are used to estimate the risk premium, and thus not only do the estimates give insight into the foreign exchange market behaviour but also into some linkages between the various segments of the financial market as a whole.

Suggested Citation

  • Vít Pošta, 2012. "Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market," Prague Economic Papers, Prague University of Economics and Business, vol. 2012(1), pages 3-17.
    • Handle: RePEc:prg:jnlpep:v:2012:y:2012:i:1:id:407:p:3-17
    DOI: 10.18267/j.pep.407
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    More about this item

    Keywords

    Kalman filter; financial market; foreign exchange risk premium; interest rate parity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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