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The European Exchange Rate Mechanism and the Volatility of the Sterling-Deutschemark Exchange Rate

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  • Pesaran, B
  • Robinson, G

Abstract

Sterling membership of the ERM focused interest on the sterling-deutsche mark exchange rate, with commentators predicting a reduction in exchange rate volatility. This paper analyzes the sterling-deutsche mark rate pre- and post-ERM entry, and finds that ERM membership significantly reduced volatility. This reduction in volatility is characterized by the disappearance of ARCH effects, evident prior to ERM membership. The paper argues that the disappearance of ARCH is probably associated with a reduction in activity of speculators, particularly technical analysts. Copyright 1993 by Royal Economic Society.

Suggested Citation

  • Pesaran, B & Robinson, G, 1993. "The European Exchange Rate Mechanism and the Volatility of the Sterling-Deutschemark Exchange Rate," Economic Journal, Royal Economic Society, vol. 103(421), pages 1418-1431, November.
    • Handle: RePEc:ecj:econjl:v:103:y:1993:i:421:p:1418-31
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    Citations

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    Cited by:

    1. Jérôme Creel & Henri Sterdyniak, 1998. "À propos de la volatilité de l'euro," Revue de l'OFCE, Programme National Persée, vol. 65(1), pages 199-226.
    2. repec:hal:spmain:info:hdl:2441/2963 is not listed on IDEAS
    3. Jérôme Creel & Henri Sterdyniak, 1998. "Discussing Euro Volatility," Sciences Po publications 98-03, Sciences Po.
    4. repec:hal:wpspec:info:hdl:2441/2963 is not listed on IDEAS
    5. Bahram Pesaran & Gary Robinson, 1993. "The Statistical Distribution of Short-Term Libor Rates Under Two Monetary Regimes," Bank of England working papers 16, Bank of England.
    6. M Ali Kemal, 2005. "Exchange Rate Instability and Trade: The Case of Pakistan," PIDE Research Report 2005:186, Pakistan Institute of Development Economics.
    7. repec:spo:wpecon:info:hdl:2441/2963 is not listed on IDEAS
    8. repec:hal:spmain:info:hdl:2441/2973 is not listed on IDEAS
    9. Caporale, Guglielmo Maria & Pittis, Nikitas, 1996. "Modelling the sterling-deutschmark exchange rate: Non-linear dependence and thick tails," Economic Modelling, Elsevier, vol. 13(1), pages 1-14, January.
    10. repec:spo:wpecon:info:hdl:2441/2973 is not listed on IDEAS
    11. Caporale, Guglielmo Maria & Hassapis, Christis & Pittis, Nikitas, 1998. "Conditional Leptokurtosis and Non-Linear Dependence in Exchange Rate Returns," Journal of Policy Modeling, Elsevier, vol. 20(5), pages 581-601, October.
    12. Gary Robinson, 1993. "The Effect of Futures Trading on Cash Market Volatility: Evidence from the London Stock Exchange," Bank of England working papers 19, Bank of England.
    13. repec:hal:wpspec:info:hdl:2441/2973 is not listed on IDEAS
    14. Fayolle, J. & Micolet, P-E., 1998. "Cycles internationaux et européens: éléments pour une problématique appliquée," Documents de Travail de l'OFCE 1998-01, Observatoire Francais des Conjonctures Economiques (OFCE).
    15. Chadha, Jagjit S. & Nolan, Charles, 2001. "Inflation Targeting, Transparency and Interest Rate Volatility: Ditching Monetary Mystique in the U.K," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 349-366, July.
    16. M. Ali Kemal, 2005. "Exchange Rate Instability and Trade. The Case of Pakistan," PIDE-Working Papers 2005:186, Pakistan Institute of Development Economics.
    17. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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