Common factors of the exchange risk premium in emerging european markets

Joseph P. Byrne*, Jun Nagayasu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)
6 Downloads (Pure)


Existing empirical evidence suggests that the Uncovered Interest Rate Parity condition may not hold due to an exchange risk premium. For a panel dataset of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in advanced countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.

Original languageEnglish
Pages (from-to)s71-s85
Number of pages15
JournalBulletin of Economic Research
Issue numberS1
Early online date6 Jun 2012
Publication statusPublished - 10 Dec 2012


  • common factors
  • emerging economies
  • exchange risk premiums
  • uncovered interest rate parity


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