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Regime switching as a test for exchange rate bubbles
Author(s) -
van Norden Simon
Publication year - 1996
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199605)11:3<219::aid-jae394>3.0.co;2-s
Subject(s) - economics , econometrics , exchange rate , liberian dollar , us dollar , test (biology) , simple (philosophy) , bubble , monetary economics , computer science , geology , paleontology , philosophy , finance , epistemology , parallel computing
This paper develops a new test for speculative bubbles, which is applied to data for the Japanese yen, the German mark and the Canadian dollar exchange rates from 1977 to 1991. The test assumes that bubbles display a particular kind of regime‐switching behaviour, which is shown to imply coefficient restrictions on a simple switching‐regression model of exchange rate innovations. Test results are sensitive to the specification of exchange rate fundamentals and other factors. Evidence most consistent with the bubble hypothesis is found using an overshooting model of the Canadian dollar and a PPP model of the Japanese yen.