THE RISK PREMIUM IN THE FOREIGN EXCHANGE MARKET. THE APPLICATION OF ARCH-IN-MEAN MODEL

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Opublikowane:
Dec 23, 2020
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Tom 21 Nr 2 (2020)
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Katarzyna Czech
Institute of Economics and Finance,Warsaw University of Life Sciences - SGGW, Poland
https://orcid.org/0000-0002-0660-7124

DOI: https://doi.org/10.22630/MIBE.2020.21.2.7
Abstrakt
Forward premium anomaly is one of the most popular puzzles in the theory of international finance. The phenomenon is explained by, among others, the existence of non-zero risk premium in the foreign exchange market. The paper applies ARCH-in-mean models to assess whether there exists a time-varying risk premium in the USD/PLN and AUD/JPY foreign exchange markets. The results indicate the existence of a non-zero risk premium in the analyzed markets. As far as the USD/PLN is concerned, the risk premium takes negative values when the risk measured by conditional variance rises. The results suggest that when there is a surge in risk, the US dollar’s appreciation and Polish zloty depreciation increases. The results confirm the US dollar as a safe-haven currency that tends to appreciate during high-volatility and crisis periods. Moreover, the study shows that the risk premium in the AUD/JPY market takes positive values when the risk measured by conditional variance rises. It implies that when there is a mount in risk, the appreciation of Japanese yen increases. Furthermore, research results reveal the positive and significant relationship between stock market uncertainty and exchange rates conditional volatility.

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Czech, K. (2020). THE RISK PREMIUM IN THE FOREIGN EXCHANGE MARKET. THE APPLICATION OF ARCH-IN-MEAN MODEL. Metody Ilościowe W Badaniach Ekonomicznych, 21(2), 71–79. https://doi.org/10.22630/MIBE.2020.21.2.7
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