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Excess volatility of exchange rates with unobservable fundamentals

  • Leonardo Bartolini
  • Lorenzo Giorgianni

We present tests of excess volatility of exchange rates that impose minimal structure on the data and do not commit to a choice of exchange rate "fundamentals." Our method builds on existing volatility tests of asset prices, combining them with a procedure that extracts unobservable fundamentals from survey-based exchange rate expectations. We apply our method to data for the three major exchange rates since 1984 and find broad evidence of excess volatility with respect to the predictions of the canonical asset-pricing model of the exchange rate with rational expectations.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 103.

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Date of creation: 2000
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Handle: RePEc:fip:fednsr:103
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  22. Gardeazabal, Javier & Regulez, Marta & Vazquez, Jesus, 1997. "Testing the Canonical Model of Exchange Rates with Unobservable Fundamentals," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 389-404, May.
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