Conditional variance and the risk premium in the foreign exchange market

Domowitz, Ian; Hakkio, Craig S.

doi:10.1016/0022-1996(85)90018-2

Cited by 421 publications

(226 citation statements)

References 13 publications

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“…Models for the term structure using an estimate of the conditional variance as a proxy for the risk premium are given in Engle, Lilien and Robins (1985). The same idea is applied to the foreign exchange market in Domowitz and Hakkio (1985). In Weiss (1984) ARMA models with ARCH errors are found to be successful in modelling thirteen different U.S. macroeconomic time series.…”

Section: Introductionmentioning

confidence: 99%

Generalized autoregressive conditional heteroskedasticity

Bollerslev

1986

Journal of Econometrics

17,637

9,400

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A natural generalization of the ARCH (Autoregressive Conditional Heteroskedastic) process introduced in Engle (1982) to allow for past conditional variances in the current conditional variance equation is proposed. Stationarity conditions and autocorrelation structure for this new class of parametric models are derived. Maximum likelihood estimation and testing are also considered. Finally an empirical example relating to the uncertainty of the inflation rate is presented.

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Section: Introductionmentioning

confidence: 99%

Generalized autoregressive conditional heteroskedasticity

Bollerslev

1986

Journal of Econometrics

17,637

9,400

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“…On the one hand, using weekly data for the Australian/US dollar, Kendall and McDonald (1989) find significant estimate for a GARCH(1, 1)-in-mean model. On the other hand, Domowitz and Hakkio (1985) find little evidence of ARCH-M effects for monthly returns from holding five foreign currencies. Bekaert and Hodrick (1993) use ARCH as well as GARCH models, and find that considerable variation in the risk premium remains even if one takes the conditional variance of the spot rate into account.…”

Section: Introductionmentioning

confidence: 76%

A Nonlinear Analysis of Forward Premium and Volatility

Hsu¹,

Kügler²

1997

Studies in Nonlinear Dynamics &Amp; Econometrics

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“…It has been known that the interest differentials might explain just a small part of changes in exchange rates. Dmowitz and Hakkio (1985) argues that b 1 which is smaller than 1 because of a time-varying risk premium on foreign exchange market [5] . If investors are risk inverse for domestic assets in foreign exchange markets, they need higher interest rate to hold the assets than the risk neutral investors.…”

Section: Advances In Social Science Education and Humanities Researcmentioning

confidence: 99%

The Research of Uncovered Interest Parity and Monetary Policy

Li¹,

Lin²

2017

Proceedings of the 2017 3rd International Conference on Social Science and Higher Education

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Abstract-This article introduces the theory of uncovered interest parity and describes the relationship between monetary policy and the UIP theory. The UIP means that the expected rate of depreciation of domestic currency against one foreign currency is equal to the interest rate differential in the two countries. This article will demonstrate the theory of UIP with some past econometric tests and discuss whether this theory can hold in different time horizons. Then, how the UIP influences the monetary Policy will be showed in the subsequent part. The UIP is more important in the economic analysis perspective than in the exchange rate market. The simple UIP condition could not be an efficient predictor in the open economy, but its usefulness in international finance researches is obvious.

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Conditional variance and the risk premium in the foreign exchange market

Cited by 421 publications

References 13 publications

Generalized autoregressive conditional heteroskedasticity

Generalized autoregressive conditional heteroskedasticity

A Nonlinear Analysis of Forward Premium and Volatility

The Research of Uncovered Interest Parity and Monetary Policy

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