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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