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Macroeconomic sources of foreign exchange risk premium: evidence from South Africa

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  • Bernard Walley

Abstract

This study investigates the macroeconomic sources of foreign exchange risk premium in South Africa using the stochastic discount factor (SDF) approach based on observable macroeconomic factors. Using the multivariate GARCH-in-mean model with no-arbitrage condition, I find support for the role of nominal and real macroeconomic factors as important determinants of foreign exchange risk premium in South Africa. However, while inflation rate and broad money growth are associated higher risk premium, consumption growth appears to be associated with lower risk premium. Finally, the time varying nature of foreign exchange risk premia in South Africa suggest that, policymakers in South Africa need to broaden their analysis of fluctuations in foreign exchange rates to include an assessment of the foreign exchange risk premia. Copyright Springer Science+Business Media New York 2015

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  • Bernard Walley, 2015. "Macroeconomic sources of foreign exchange risk premium: evidence from South Africa," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 382-395, April.
    • Handle: RePEc:spr:jecfin:v:39:y:2015:i:2:p:382-395
    DOI: 10.1007/s12197-013-9268-9
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    More about this item

    Keywords

    Foreign exchange; Risk premium; Stochastic discount factor; Consumption; Inflation; F31; G32; G10;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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