Premium
Excess Volatility of Exchange Rates with Unobservable Fundamentals
Author(s) -
Bartolini Leonardo,
Giorgianni Lorenzo
Publication year - 2001
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00297
Subject(s) - unobservable , economics , volatility (finance) , econometrics , exchange rate , commit , rational expectations , volatility swap , implied volatility , financial economics , monetary economics , computer science , database
The authors present tests of excess volatility of exchange rates which impose minimal structure on the data and do not commit to a choice of exchange rate “fundamentals.” The method builds on existing volatility tests of asset prices, combining them with a procedure that extracts unobservable fundamentals from survey‐based exchange rate expectations. The method is applied to data for the three major exchange rates since 1984, and broad evidence is given of excess volatility with respect to the predictions of the canonical asset‐pricing model of the exchange rate with rational expectations.