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Do exchange rate bubbles deflate faster than they inflate?

  • Michael Bleaney

    ()

    (University of Nottingham)

  • Zhiyong Li

    ()

    (University of Nottingham)

Some theories predict that exchange rate bubbles should deflate faster than they inflate. We find no empirical support for this hypothesis for currencies that floated against the US dollar. The bursting of exchange rate bubbles is not analogous to collapses in the prices of financial assets. Financial asset prices tend to fall faster than they rise, which suggests that the same might be true of relatively risky currencies. We find no evidence that other currencies depreciate faster against the US dollar than they appreciate, even though the US dollar is commonly regarded as a potential safe-haven currency. This is true even of emerging-market currencies.

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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I3-P2.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 3 ()
Pages: 1542-1548

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Handle: RePEc:ebl:ecbull:eb-09-00301
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  1. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
  2. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
  3. Kathy Yuan, 2005. "Asymmetric Price Movements and Borrowing Constraints: A Rational Expectations Equilibrium Model of Crises, Contagion, and Confusion," Journal of Finance, American Finance Association, vol. 60(1), pages 379-411, 02.
  4. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
  5. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Hannover Economic Papers (HEP) dp-352, Leibniz Universit├Ąt Hannover, Wirtschaftswissenschaftliche Fakult├Ąt.
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