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Are there bubbles in the Sterling-dollar exchange rate? New evidence from sequential ADF tests

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  • Bettendorf, Timo
  • Chen, Wenjuan

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.

Suggested Citation

  • Bettendorf, Timo & Chen, Wenjuan, 2013. "Are there bubbles in the Sterling-dollar exchange rate? New evidence from sequential ADF tests," Economics Letters, Elsevier, vol. 120(2), pages 350-353.
  • Handle: RePEc:eee:ecolet:v:120:y:2013:i:2:p:350-353
    DOI: 10.1016/j.econlet.2013.04.039
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    More about this item

    Keywords

    Exchange rates; Rational bubbles; Sequential unit root test;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F3 - International Economics - - International Finance

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