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Uncertain Times Call for Priced Measures - Economic policy uncertainty and EUR/USD exchange rate risk premium

Turunen, Jona LU and Robertsson, Sebastian LU (2025) NEKH02 20251
Department of Economics
Abstract
The thesis investigates European economic policy uncertainty and its influence on the currency risk premium embedded in the EUR/USD exchange rate. We build a time-series regression model utilizing monthly data from 1999 to 2020. Currency risk premium is proxied with realized excess returns. The model uses control variables for inflation differentials, and global risk sentiment, proxied by the VIX Index. The results show that European economic policy uncertainty is statistically insignificant in all model specifications. The VIX Index is statistically significant and has a negative relationship with changes in the currency risk premium. Findings suggest that European economic policy uncertainty may not significantly affect short-run... (More)
The thesis investigates European economic policy uncertainty and its influence on the currency risk premium embedded in the EUR/USD exchange rate. We build a time-series regression model utilizing monthly data from 1999 to 2020. Currency risk premium is proxied with realized excess returns. The model uses control variables for inflation differentials, and global risk sentiment, proxied by the VIX Index. The results show that European economic policy uncertainty is statistically insignificant in all model specifications. The VIX Index is statistically significant and has a negative relationship with changes in the currency risk premium. Findings suggest that European economic policy uncertainty may not significantly affect short-run movements in the currency risk premium, and that global risk sentiment is more influential. (Less)
Please use this url to cite or link to this publication:
author
Turunen, Jona LU and Robertsson, Sebastian LU
supervisor
organization
course
NEKH02 20251
year
type
M2 - Bachelor Degree
subject
keywords
Economic policy uncertainty, uncertainty, currency, exchange rate risk premium, risk premium
language
English
id
9194977
date added to LUP
2025-09-12 09:16:29
date last changed
2025-09-12 09:16:29
@misc{9194977,
  abstract     = {{The thesis investigates European economic policy uncertainty and its influence on the currency risk premium embedded in the EUR/USD exchange rate. We build a time-series regression model utilizing monthly data from 1999 to 2020. Currency risk premium is proxied with realized excess returns. The model uses control variables for inflation differentials, and global risk sentiment, proxied by the VIX Index. The results show that European economic policy uncertainty is statistically insignificant in all model specifications. The VIX Index is statistically significant and has a negative relationship with changes in the currency risk premium. Findings suggest that European economic policy uncertainty may not significantly affect short-run movements in the currency risk premium, and that global risk sentiment is more influential.}},
  author       = {{Turunen, Jona and Robertsson, Sebastian}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Uncertain Times Call for Priced Measures - Economic policy uncertainty and EUR/USD exchange rate risk premium}},
  year         = {{2025}},
}