Uncovered Interested Parity and Risk Premium—The Application of GARCH-M and GARCH-X model

• Main Authors: Kuo-Ming Lee, 李國銘
• Other Authors: Lii-tarn Chen
• Format: Others
• Language: zh-TW
• Published: 2007
• Online Access: http://ndltd.ncl.edu.tw/handle/99222512415595744579

碩士 === 國立中央大學 === 產業經濟研究所 === 96 === Substantial empirical literature has rejected the ‘simple efficiency’ hypothesis of the foreign exchange market. A recognized alternative hypothesis is that a risk premium exists. This paper further uses the hypotheses which assume that people have the same risk-aversion attitude to different countries. This paper attempts to present two empirical models which postulate the risk premium as a function of the conditional variance of market forecast errors. I use GARCH-M and GARCH-X model to model the forecast errors. They have provided a convenient framework for modeling time-varying conditional variance of the prices of financial assets and have been successfully applied to estimate the time-varying risk premium in the assets markets. My estimates provide evidence of a risk premium for all the two conracts covered in this paper.