Abstract
In this paper, we empirically examine time-varying risk premia in the Tunisian foreign exchange market by applying GARCH-M modeling to the TND/Euro and TND/USD parities for 1 to 12 months forecasting horizons. Our ultimate objective is to help better manage the parities and to help provide stability to a foreign exchange market where EMH is very weak. Our findings show 1) a heteroscedasticity of residuals for the TND/Euro (all forecasting horizons) and the TND/USD(for 1 month) indicating a lack of stability of their volatility; 2) a non-significant standard deviation of the risk premium against the presence of ARCH and GACH in all cases. On the other hand, the descriptive analysis of the risk premium and term premium variables show an asymmetric distribution. We used, therefore, the asymmetric GARCH model, E-GARCH. Our normality tests show, however, that the GARCH model neither allows for residuals smoothing nor improves the AIC.
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