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Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests

  • Timo Bettendorf
  • Wenjuan Chen

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.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2013-012.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-012.

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Length: 12 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2013-012
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  1. Meese, Richard A, 1986. "Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 345-73, April.
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  11. Efthymios Pavlidis & Ivan Paya & David Peel, 2012. "A New Test for Rational Speculative Bubbles using Forward Exchange Rates: The Case of the Interwar German Hyperinflation," Working Papers 18599597, Lancaster University Management School, Economics Department.
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  16. Caroline M. Betts & Timothy J. Kehoe, 2008. "Real exchange rate movements and the relative price of non-traded goods," Staff Report 415, Federal Reserve Bank of Minneapolis.
  17. Bohl, Martin T. & Kaufmann, Philipp & Stephan, Patrick M., 2013. "From hero to zero: Evidence of performance reversal and speculative bubbles in German renewable energy stocks," Energy Economics, Elsevier, vol. 37(C), pages 40-51.
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  19. Evans, George W, 1986. "A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981-84," American Economic Review, American Economic Association, vol. 76(4), pages 621-36, September.
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