Measuring the risk premium in uncovered interest parity using the component GARCH-M model

Exchange Rate Volatility and Uncovered Interest Rate Parity in the European Emerging Economies

“…Our results assert that UIRP theory does not hold in these four countries. Also, our findings are in line with the conclusion of Li et al (2012) who investigated ten develop and emerging markets and found similar results. They contended that none of the emerging market have negative coefficient in front of IRD but quite opposite.…”

“…reflecting shocks to economic fundamentals, and transitory volatility, which is driven by market sentiment and short-term position-taking (Pramor and Tamirisa, 2006). Many authors verified its superior performances for modelling exchange rate volatility comparing to other GARCH type models (Black and McMilan, 2004;Pramor and Tamirisa, 2006;Li et al, 2012). We have used CGARCH-M specification following the works of Pramor and Tamirisa (2006), Li et al (2012) and Tai (1999).…”

“…Many authors verified its superior performances for modelling exchange rate volatility comparing to other GARCH type models (Black and McMilan, 2004;Pramor and Tamirisa, 2006;Li et al, 2012). We have used CGARCH-M specification following the works of Pramor and Tamirisa (2006), Li et al (2012) and Tai (1999). The GARCH-M added the conditional standard deviation (σ t+1 ) as a time-varying risk premium.…”

“…Otherwise, if α ≠ 0 but γ = 0, there is a constant risk premium. However, when γ ≠ 0 the time-varying risk premium exists (Li, et al, 2012). The conditional density function (ε t + 1| I t ) is modelled as i.i.d., and I t is the information set available at time t. All models were estimated by quasi maximum likelihood (QMLE) technique which is robust to the non-normal distribution.…”

Funding liquidity constraints and the forward premium anomaly in a DSGE model

“…Consequently, over short time horizons the risk premium is small and the slope coefficient in the UIP equation might be close to one. Li, Ghoshray, and Morley (2012) use the component GARCH-in-mean model to measure the time-varying risk premium in UIP. Their results suggest that risk premium is an important determinant for analyzing the exchange rate dynamics for most developed and emerging countries.…”