Determinants of the Foreign Exchange Risk Premium in Gulf Cooperation Council Countries

November 1, 2010

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Format: Chicago

Tigran Poghosyan. Determinants of the Foreign Exchange Risk Premium in Gulf Cooperation Council Countries, (USA: International Monetary Fund, 2010) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyzes macroeconomic determinants of the foreign exchange risk premium in two Gulf Cooperation Council (GCC) countries that peg their currencies to the U.S. dollar: Saudi Arabia and the United Arab Emirates. The analysis is based on the stochastic discount factor methodology, which imposes a no arbitrage condition on the relationship between the foreign exchange risk premium and its macroeconomic determinants. Estimation results suggest that U.S. inflation and consumption growth are important factors driving the risk premium, which is in line with the standard C-CAPM model. In addition, growth in international oil prices influences the risk premium, reflecting the important role played by the hydrocarbon sector in GCC economies. The methodology employed in this paper can be used for forecasting the risk premium on a monthly basis, which has important practical implications for policymakers interested in the timely monitoring of risks in the GCC.

Subject: Consumption, Currencies, Exchange rate risk, Financial regulation and supervision, Money, National accounts, Oil prices, Prices, Return on investment

Keywords: Consumption, Covariance term, Currencies, Exchange rate, Exchange rate risk, Foreign exchange, Foreign exchange risk, Foreign exchange risk premium, GCC, Global, Multivariate GARCH-in- Mean, Obtained risk premium expression, Oil price, Oil prices, Return on investment, Time-varying risk premium, Variance-covariance matrix, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/255
Stock No:

WPIEA2010255
ISBN:

9781455209552
ISSN:

1018-5941

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