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Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests

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  • Timo Bettendorf
  • Wenjuan Chen

Abstract

There has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets. This paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles. We find strong evidence of explosive behavior in the nominal Sterling-dollar exchange rate. However, this explosive behavior should not be simply interpreted as evidence of rational bubbles, as we show that it might be driven by the relative prices of traded goods.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2013-012.pdf
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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-012.

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Length: 12 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2013-012

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Keywords: exchange rates; rational bubbles; sequential unit root test;

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  1. Efthymios Pavlidis & Ivan Paya & David Peel, 2012. "A New Test for Rational Speculative Bubbles using Forward Exchange Rates: The Case of the Interwar German Hyperinflation," Working Papers 18599597, Lancaster University Management School, Economics Department.
  2. Engel, Charles & West, Kenneth D., 2003. "Exchange rates and fundamentals," Working Paper Series, European Central Bank 0248, European Central Bank.
  3. Peter C. B. Phillips & Shu-Ping Shi & Jun Yu, 2012. "Testing for Multiple Bubbles," Working Papers, Singapore Management University, School of Economics 13-2012, Singapore Management University, School of Economics.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  5. Peter C.B.Phillips & Jun Yu, 2009. "Dating the Timeline of Financial Bubbles During the Subprime Crisis," Working Papers CoFie-07-2009, Sim Kee Boon Institute for Financial Economics.
  6. Peter C.B.Phillips & Yangru Wu & Jun Yu, 2009. "Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?," Working Papers CoFie-03-2008, Sim Kee Boon Institute for Financial Economics.
  7. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 922-30, September.
  8. Al-Anaswah, Nael & Wilfling, Bernd, 2011. "Identification of speculative bubbles using state-space models with Markov-switching," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(5), pages 1073-1086, May.
  9. Evans, George W, 1986. "A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981-84," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 621-36, September.
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  11. West, Kenneth D., 1987. "A standard monetary model and the variability of the deutschemark-dollar exchange rate," Journal of International Economics, Elsevier, Elsevier, vol. 23(1-2), pages 57-76, August.
  12. Caroline M. Betts & Timothy J. Kehoe, 2008. "Real Exchange Rate Movements and the Relative Price of Non-traded Goods," NBER Working Papers 14437, National Bureau of Economic Research, Inc.
  13. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  14. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 353-373, November.
  15. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
  16. Meese, Richard A, 1986. "Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(2), pages 345-73, April.
  17. Wu, Yangru, 1995. "Are there rational bubbles in foreign exchange markets? Evidence from an alternative test," Journal of International Money and Finance, Elsevier, Elsevier, vol. 14(1), pages 27-46, February.
  18. Behzad T. Diba & Herschel I. Grossman, 1984. "Rational Bubbles in the Price of Gold," NBER Working Papers 1300, National Bureau of Economic Research, Inc.
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Cited by:
  1. Itamar Caspi & Nico Katzke & Rangan Gupta, 2014. "Date Stamping Historical Oil Price Bubbles: 1876-2014," Working Papers 201445, University of Pretoria, Department of Economics.
  2. Friedrich Poeschel, 2013. "Assortative matching through signals," 2013 Papers, Job Market Papers ppo178, Job Market Papers.

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