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Robustness and Exchange Rate Volatility

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Abstract

This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can easily explain observed exchange rate volatility.

Suggested Citation

  • Edouard Djeutem & Ken Kasa, 2012. "Robustness and Exchange Rate Volatility," Discussion Papers dp12-01, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp12-01
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    4. Djeutem Edouard & Nguimkeu Pierre, 2020. "Robust learning in the foreign exchange market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-14, January.
    5. Phornchanok Cumperayot & Casper G. de Vries, 2006. "Large Swings in Currencies driven by Fundamentals," Tinbergen Institute Discussion Papers 06-086/2, Tinbergen Institute.
    6. Yulei Luo & Jun Nie & Xiaowen Wang & Eric Young, 2021. "Production and Inventory Dynamics under Ambiguity Aversion," Research Working Paper RWP 21-05, Federal Reserve Bank of Kansas City.
    7. Chou, Yu-Hsi, 2018. "Understanding the sources of the exchange rate disconnect puzzle: A variance decomposition approach," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 267-287.
    8. Djeutem, Edouard, 2014. "Model uncertainty and the Forward Premium Puzzle," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 16-40.

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    More about this item

    Keywords

    Exchange rates; Volatility; Robustness;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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