Prague Economic Papers 2012, 21(1):3-17 | DOI: 10.18267/j.pep.407

Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market

Vít Pošta
University of Economics, Prague, Dpt. of Microeconomics (postav@vse.cz).

The paper presents both the theoretical account of the issue of foreign exchange risk premium and the actual estimates of the time-varying risk premium for the cases of the Czech koruna to euro and US dollar. The risk premium is modelled within a state space framework and estimated using the Kalman filtering procedure. Some financial market fundamentals are used to estimate the risk premium, and thus not only do the estimates give insight into the foreign exchange market behaviour but also into some linkages between the various segments of the financial market as a whole.

Keywords: Kalman filter, financial market, foreign exchange risk premium, interest rate parity
JEL classification: E44, E47, F31

Published: January 1, 2012  Show citation

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Pošta, V. (2012). Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market. Prague Economic Papers, 21(1), 3-17. doi: 10.18267/j.pep.407
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