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Risk Premiums and Exchange Rate Expectations: A Reassessment of the So-Called Dollar Peg Policies of Crisis East Asian Countries, 1994-97

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  • TAKAGI Shinji
  • ESAKA Taro

Abstract

We use an unobserved components model to extract the foreign exchange risk premium from the excess ex post returns of East Asian currency assets over US dollar assets and derive the implied expected future spot rates of East Asian currencies against the US dollar. Empirical results, obtained from monthly data on the crisis East Asian countries of Indonesia, Malaysia, Korea and Thailand for the period January 1994-June 1997, generally indicate that the risk premium was substantial and time-varying and that market participants consistently formed expectations of either appreciation or depreciation over the coming month. The presence of a risk premium means that East Asian currency assets and US dollar assets were imperfect substitutes, so that sterilization was effective. The expectations of short-term depreciation or appreciation suggest that the so-called dollar peg policies were not credible. JEL Classification: F31, F32, F33, O53

Suggested Citation

  • TAKAGI Shinji & ESAKA Taro, 2001. "Risk Premiums and Exchange Rate Expectations: A Reassessment of the So-Called Dollar Peg Policies of Crisis East Asian Countries, 1994-97," ESRI Discussion paper series 003, Economic and Social Research Institute (ESRI).
    • Handle: RePEc:esj:esridp:003
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    References listed on IDEAS

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    More about this item

    Keywords

    East Asian currency crisis; exchange rate policy in East Asia; foreign exchange risk premium; unobserved components models;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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