Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals

Author/Editor:

Lorenzo Giorgianni ; Leonardo Bartolini

Publication Date:

May 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper presents a method to test the volatility predictions of the textbook asset-pricing exchange rate model, which imposes minimal structure on the data and does not commit to a choice of exchange rate “fundamentals.” Our method builds on existing tests of excess volatility in asset prices, combining them with a procedure that extracts unobservable fundamentals from survey-based exchange rate expectations. We apply our method to data for the three major exchange rates since 1984 and find broad evidence of excess exchange rate volatility with respect to the predictions of the canonical asset-pricing model in an efficient market.

Series:

Working Paper No. 1999/071

Subject:

Currencies Currency markets Exchange rate modelling Exchange rates Financial markets Foreign exchange Income inequality Money National accounts

English

Publication Date:

May 1, 1999

ISBN/ISSN:

9781451849226/1018-5941

Stock No:

WPIEA0711999

Pages:

20

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