The Forward-Discount Puzzle in Central and Eastern Europe.

Hayward, R. and Holscher, J., 2017. The Forward-Discount Puzzle in Central and Eastern Europe. Comparative Economic Studies, 59 (4), pp. 472-497.

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DOI: 10.1057/s41294-017-0033-5

Abstract

This paper adds to evidence that the forward-discount puzzle is at least partly explained as a compensation for taking crash-risk. A number of Central and Eastern European exchange rates are compared. A Hidden Markov Model is used to identify two regimes for most of the exchange rates. These two regimes can be characterised as being either periods of stability or periods of instability. The level of international risk aversion and changes in US interest rates affect the probability of switching from one regime to the other. This model is then used to assess the way that these two factors affect the probability of a currency crisis. While the Czech Republic, Hungary and Bulgaria are very sensitive to international financial conditions, Poland and Romania are relatively immune. JEL classifications: C24, F31, F32; Key words: Exchange rates, uncovered interest parity, foreign exchange risk discount, hidden-Markov model, carry-trade

Item Type:Article
ISSN:0888-7233
Additional Information:This is a post-peer-review, pre-copy-edit version. direct link to the publisher's website and the article - https://link.springer.com/article/10.1057/s41294-017-0033-5
Uncontrolled Keywords:Exchange rates; Uncovered interest parity; Foreign exchange risk discount; Hidden-Markov model; Carry-trade
Group:Faculty of Management
ID Code:30467
Deposited By: Unnamed user with email symplectic@symplectic
Deposited On:06 Apr 2018 15:38
Last Modified:01 May 2018 11:02

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