Time-varying/Sign-switching Risk Perception on Foreign Exchange Markets
نویسندگان
چکیده
In this paper we analyze the consequences of considering risk-augmented speci cations of the relationship between spot and forward rates. Previous parametric speci cations 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 exible 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.
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