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Study of the dollar-euro exchange rate

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Author Info
Ariño, Miguel A. () (IESE Business School)
Canela, Miguel A. (Universitat de Barcelona)
Abstract

In this paper we broadly describe the changes in the dollar-euro exchange rate from the time the euro came into effect at the beginning of 1999 until the end of 2005, using daily data. We show how movements in this exchange rate can be presented in different ways, depending on the time scale we use. First, if we focus on periods of more than six months, the changes in the dollar-euro rate can be described using a succession of linear trends. Superimposed on this trend line are cycles lasting from one to three months. Lastly, on a daily scale, the exchange rate behavior is virtually unpredictable, very close to what econometricians call white noise. These patterns are not exclusive to the dollar-euro rate, but are shared by the dollar exchange rates of most free-floating currencies. Taking the exchange value of the dollar against a basket of currencies used by the Federal Reserve, we show that the patterns we observe may be attributed to changes in the "intrinsic" value of the dollar.

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Publisher Info
Paper provided by IESE Business School in its series IESE Research Papers with number D/620.

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Length: 19 pages
Date of creation: 25 Mar 2006
Date of revision: 30 Mar 2006
Handle: RePEc:ebg:iesewp:d-0620

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Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
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Related research
Keywords: Exchange rate; volatility; trade weighted exchange index; random walk;

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References listed on IDEAS
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  3. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2002. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," Working Papers 02-16, Duke University, Department of Economics. [Downloadable!]
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  4. Michael Ehrmann & Marcel Fratzscher & Roberto Rigobon, 2005. "Stocks, bonds, money markets and exchange rates - measuring international financial transmission," Working Paper Series 452, European Central Bank. [Downloadable!]
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  5. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March. [Downloadable!] (restricted)
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  6. Liu, Christina Y & He, Jia, 1991. " A Variance-Ratio Test of Random Walks in Foreign Exchange Rates," Journal of Finance, American Finance Association, vol. 46(2), pages 773-85, June. [Downloadable!] (restricted)
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  8. C. John McDermott & Alasdair Scott, 2000. "Concordance in Business Cycles," IMF Working Papers 00/37, International Monetary Fund.
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  9. Hui Guo & Robert Savickas, 2006. "Idiosyncratic volatility, economic fundamentals, and foreign exchange rates," Working Papers 2005-025, Federal Reserve Bank of St. Louis. [Downloadable!]
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