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Periodically Collapsing Rational Bubbles in Exchange Rates: A Markov-Switching Analysis for a Sample of Industrialised Markets

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Author Info
Jose Eduardo de A. Ferreira
Abstract

This paper investigates the presence of periodically collapsing rational bubbles in exchange rates for a sample of industrialised countries. A periodically collapsing rational bubble is defined as an explosive deviation from economic fundamentals with distinct expansion and contraction phases in finite time. By using Markov-switching regime models we were not able to find robust evidence of a bubble driving the exchange rate away from fundamentals. Moreover, the results also revealed significant non-linearities and different regimes. The importance of these findings suggests that linear monetary models may not be appropriate to examine exchange rate movements.

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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0604.pdf
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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0604.

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Date of creation: Sep 2006
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Handle: RePEc:ukc:ukcedp:0604

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Related research
Keywords: Foreign Exchange Bubbles Fundamentals Markov-Switching Assets

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  1. Sarno, Lucio & Taylor, Mark P., 1999. "Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 637-657, August. [Downloadable!] (restricted)
  2. Mike Artis & Hans-Martin Krolzig & Juan Toro, 2004. "The European business cycle," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 1-44, January.
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  3. Lutz Kilian & Mark P. Taylor, 2001. "Why is it so difficult to beat the Random Walk Forecast of Exchange Rates?," Tinbergen Institute Discussion Papers 01-031/4, Tinbergen Institute. [Downloadable!]
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  4. Taylor, Mark P. & Peel, David A., 1998. "Periodically collapsing stock price bubbles: a robust test," Economics Letters, Elsevier, vol. 61(2), pages 221-228, November. [Downloadable!] (restricted)
  5. Krolzig, Hans-Martin & Sensier, Marianne, 2000. "A Disaggregated Markov-Switching Model of the Business Cycle in UK Manufacturing," Manchester School, University of Manchester, vol. 68(4), pages 442-60, Special I. [Downloadable!] (restricted)
  6. Robert J. Shiller, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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