The Forward-Discount Puzzle in Central and Eastern Europe

Robert Hayward, Jens Holscher

Research output: Contribution to journalArticlepeer-review


This paper adds to evidence that the forward-discount puzzle is at least in part
explained as a compensation for taking crash risk. A number of Central and
Eastern European exchange rates are compared. A hidden Markov model is used to
identify two regimes for most of the exchange rates. These two regimes can be
characterised as being either periods of calm or periods of crisis The level of
international risk aversion and changes in US interest rates affect the probability
of switching from one regime to the other. This model is then used to assess the
way that these two factors affect the probability of a currency crisis. While the
Czech Republic, Hungary and Bulgaria are very sensitive to international financial
conditions, Poland and Romania are relatively immune.
Original languageEnglish
Pages (from-to)472–497
JournalComparative economic studies
Issue number4
Publication statusPublished - 22 Aug 2017


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