IMF Working Papers

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

By Lorenzo Giorgianni, Leonardo Bartolini

May 1, 1999

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Lorenzo Giorgianni, and Leonardo Bartolini. Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals, (USA: International Monetary Fund, 1999) accessed November 8, 2024
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.

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

Publication Details

  • Pages:

    20

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1999/071

  • Stock No:

    WPIEA0711999

  • ISBN:

    9781451849226

  • ISSN:

    1018-5941

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