Exchange rate risk in Central European countries

Abstract

We address the issue of foreign exchange risk and its macroeconomic determinants in several Central European (CE) economies. The joint distribution of excess returns in the foreign exchange market and observable country-specific macroeconomic factors is modeled using the stochastic discount factor (SDF) approach and a multivariate GARCH-in-mean model.

We find that real factors seem to lack significance in determining foreign exchange risk, while nominal factors (inflation and money) have a significant impact. The differences in the impact of nominal factors are related to the actual monetary policy regimes adopted in the countries examined.