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Betting on the EMS

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Listed:
  • Kees Koedijk
  • Clemens Kool

Abstract

Two speculative strategies within the European Monetary System are empirically evaluated. The potential profitability of speculating on a currency's devaluation at a realignment crucially depends on being able to predict timing and magnitude of the parity change. Such opportunity has been eliminated from the system since 1983. For the reverse strategy of “borrowing low, investing high,” the evidence since 1983 suggests significant profitable opportunities for the weaker EMS countries — Belgium, Denmark, France and Italy — unconditional on knowledge of the timing of realignments. We conclude that this is due to a “peso problem” type of premium. Copyright Kluwer Academic Publishers 1993

Suggested Citation

  • Kees Koedijk & Clemens Kool, 1993. "Betting on the EMS," Open Economies Review, Springer, vol. 4(2), pages 151-173, June.
    • Handle: RePEc:kap:openec:v:4:y:1993:i:2:p:151-173
    DOI: 10.1007/BF01000517
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    References listed on IDEAS

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    1. Alberto Giovannini, 1990. "European Monetary Reform: Progress and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 217-292.
    2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    3. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 269-328, National Bureau of Economic Research, Inc.
    4. Baldwin, Richard, 1990. "Re-Interpreting the Failure of Foreign Exchange Market Efficiency Tests: Small Transaction Costs, Big Hysteresis Bands," CEPR Discussion Papers 407, Centre for Economic Policy Research.
    5. Giovannini, Alberto, 1991. "On gradual monetary reform," European Economic Review, Elsevier, vol. 35(2-3), pages 457-466, April.
    6. Bilson, John F. O. & Hsieh, David A., 1987. "The profitability of currency speculation," International Journal of Forecasting, Elsevier, vol. 3(1), pages 115-130.
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    Cited by:

    1. Annamaria Simonazzi & Fernando Vianello, 1996. "Credibility or exit speed? Reflections prompted by the 1992 EMS crisis," Working Papers in Public Economics 11, Department of Economics and Law, Sapienza University of Rome.
    2. Vlaar, P. J. G. & Palm, F. C., 1997. "Inflation differentials and excess returns in the European Monetary System," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 1-20, April.

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