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A Non-parametric analysis of ERM exchange rate fundamentals

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Abstract

In this paper we present evidence concerning the number of common stochastic trends in three major ERM exchange rates. The results indicate the presence of a single common trend driving these currencies and from this we suggest that the common trend can be considered as the ERM non-parametric fundamentals for the three selected currencies. Using a non-parametric technique, the Alternating Conditional Expectations (ACE) algorithm, we obtain evidence of the existence of non-linearities for two out of three currencies with a functional form, related to the estimated non-parametric fundamentals, close to the S-shape given by the basic target zone model.

Suggested Citation

  • José L. Torres, 2004. "A Non-parametric analysis of ERM exchange rate fundamentals," Economic Working Papers at Centro de Estudios Andaluces E2004/25, Centro de Estudios Andaluces.
    • Handle: RePEc:cea:doctra:e2004_25
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    Cited by:

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    2. Yang Hu & Les Oxley, 2016. "Are there Bubbles in Exchange Rates? Some New Evidence from G10 and Emerging Markets Countries," Working Papers in Economics 16/05, University of Waikato.

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    More about this item

    Keywords

    Exchange rate fundamentals; target zones; common trends; ACE algorithm;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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