Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals
May 1, 1999
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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.
Subject: Currencies, Currency markets, Exchange rate modelling, Exchange rates, Financial markets, Foreign exchange, Income inequality, Money, National accounts
Keywords: asset market view, benchmark rate, Currencies, Currency markets, dollar rate, exchange rate expectation, Exchange rate modelling, exchange rate volatility, Exchange rates, Income inequality, market efficiency, market rate, null hypothesis, random walk, U.S. dollar, WP
Pages:
20
Volume:
1999
DOI:
Issue:
071
Series:
Working Paper No. 1999/071
Stock No:
WPIEA0711999
ISBN:
9781451849226
ISSN:
1018-5941
