Some Evidence of Speculative Bubbles in the Foreign Exchange Markets
The authors propose that the poor performance of portfolio models is due to their exclusion of speculative bubbles. They suggest a new unce rtainty-bubble solution (as opposed to a risk-bubble solution). Discr etion is minimized because the trend of the bubble is an exact functi on of the structural parameters. For three exchange rates, the bubble -augmented portfolio model passes the usual statistical tests and per forms better than its VAR equivalent in out-of-sample dynamic simulat ion. When the model was reestimated with the bubbles removed, and wit h ordinary dummies in place of the constrained trend, the parameter e stimates were invariably insignificant. Copyright 1987 by Ohio State University Press.
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Volume (Year): 19 (1987)
Issue (Month): 4 (November)
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