Modelling the risk premium in the black-market zloty-dollar exchange rate

This paper tests for the presence of nonlinear dependence in the black-mark et Polish zloty-dollar exchange rate. Using the GARCH-M model, we illustrat e use of the Marquardt (Journal of the Society of Industrial and Applied Ma thematics, 2, 1963) alternative to the Berndt (Annals of Economical Social Measurement, 4, 1974) iterative nonlinear algorithm for the estimation of s uch models, and discrimination between estimated models on the basis of the Brock and Potter (Handbook of Statistics, 11, 1993) test for so conditiona l variance misspecification. We find evidence of a time-varying risk premiu m such that foreign speculators are compensated for increased exchange rate risk by appreciation which increases the dollar value of zloty holdings, a nd which is able to account for all of the apparent nonlinearity in the zlo ty.