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Foreign Exchange Risk Premium Determinants: Case of Armenia

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  • Tigran Poghosyan
  • Evzen Kocenda

Abstract

This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a single country context. The analysis is performed using weekly data on foreign and domestic currency deposits in Armenian banking system. The paper provides the results of the simple tests of uncovered interest parity condition, which indicate that contrary to established view dominating in empirical literature there is a positive correspondence between exchange rate depreciation and interest rate differentials in Armenian deposit market. Furthermore, the paper presents and discusses a systematic positive risk premium required by the economic agents for foreign exchange transactions, which increases over the investment horizon. The two currency affine term structure framework is applied to identify the factors driving the systematic exchange rate risk premium in Armenia. At the end, possible directions for further research are outlined.

Suggested Citation

  • Tigran Poghosyan & Evzen Kocenda, 2006. "Foreign Exchange Risk Premium Determinants: Case of Armenia," William Davidson Institute Working Papers Series wp811, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2006-811
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    References listed on IDEAS

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    1. Yemba, Boniface P., 2022. "User cost of foreign monetary assets under dollarization," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    ???forward discount??? puzzle; exchange rate risk; affine term structure models; foreign and domestic deposits; transition and emerging markets; Armenia;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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