Time-varying/sign-switching risk perception on foreign exchange markets
International journal of finance & economics, 1998, Vol. 3, No. 3, pp. 241-259
GALLO, Giampiero M., PACINI, Barbara, Time-varying/sign-switching risk perception on foreign exchange markets, International journal of finance & economics, 1998, Vol. 3, No. 3, pp. 241-259 - https://hdl.handle.net/1814/71305
Retrieved from Cadmus, EUI Research Repository
In this paper we analyse the consequences of considering risk-augmented specifications of the relationship between spot and forward rates. Previous parametric specifications such as the GARCH-M provided disappointing results possibly due to the high degree of persistence of the estimated process for conditional volatility. We propose a more flexible semiparametric approach where a nonparametric estimator of the conditional volatility is used as an instrumental variable, and we apply it on six major currencies vis-a-vis the Deutsche Mark (monthly data). An interesting picture of shifting risk perception arises when an indicator of market sentiment in the form of trading signals to purchase or sell a currency is inserted in the model. (C) 1998 John Wiley & Sons, Ltd.
First published: 21 December 1998
Cadmus permanent link: https://hdl.handle.net/1814/71305
Full-text via DOI: 10.1002/(SICI)1099-1158(199807)3:3<241
Publisher: John Wiley & Sons
Earlier different version: http://hdl.handle.net/1814/570
Version: The article is a published version of EUI ECO WP; 1995/45
Files associated with this item
There are no files associated with this item.