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Parameterizing Currency Risk in the EMS: The Irish Pound and Spanish Peseta against the German Mark

Author

Listed:
  • Paul D. McNelis

    (Georgetown University)

  • G.C. Lim

    (University of Melbourne)

Abstract

This paper compares alternative estimates of systemic time-varying excess returns for the Irish pound and the Spanish peseta, against the German mark, since 1985. We make use of progressively more complex models, going from the GARCH in Mean specification, to the International Capital Asset Pricing model (ICAPM) with a time-varying "beta", to a general equilibrium Constant Relative Risk Aversion model (CRRA), with trivariate GARCH-M estimation. The results show significant relative risk aversion as well as significant volatility effects on redictable excess returns. The time-varying "beta" has also declined in the past five years for both Ireland and Spain.

Suggested Citation

  • Paul D. McNelis & G.C. Lim, 1998. "Parameterizing Currency Risk in the EMS: The Irish Pound and Spanish Peseta against the German Mark," International Finance 9805001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:9805001
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    References listed on IDEAS

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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