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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. Peter C. B. Phillips & Jun Yu, 2009. "Dating the Timeline of Financial Bubbles During the Subprime Crisis," Finance Working Papers 23051, East Asian Bureau of Economic Research.
  2. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, 02.
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  9. Al-Anaswah, Nael & Wilfling, Bernd, 2011. "Identification of speculative bubbles using state-space models with Markov-switching," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1073-1086, May.
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