Economists often describe nominal exchange rates as forward-looking, so that they reflect discounted, expected, future fundamentals. This study applies a method for identifying the discount rate involved, without knowing or measuring fundamentals. Identification arises from assumptions on the stochastic process followed by fundamentals, combined with nonlinearity arising from expected future regime changes. Two applications yield evidence against the present-value model in the form of discount rates which are negative and statistically significant.
|Date of creation:||Jul 1995|
|Publication status:||forthcoming in the Journal of International Money and Finance|
|Contact details of provider:|| Postal: Kingston, Ontario, K7L 3N6|
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- Smith, Gregor W. & Smith, R. Todd, 1997.
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- Gregor W. Smith & R. Todd Smith, 1988. "Stochastic Process Switching and the Return to Gold, 1925," Working Papers 723, Queen's University, Department of Economics.
- Officer, Lawrence H., 1985. "Integration in the American Foreign-Exchange Market, 1791–1900," The Journal of Economic History, Cambridge University Press, vol. 45(03), pages 557-585, September.
- Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May.
- Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series 81, Board of Governors of the Federal Reserve System (U.S.).
- Smith, Gregor W, 1991. "Solution to a Problem of Stochastic Process Switching," Econometrica, Econometric Society, vol. 59(1), pages 237-239, January. Full references (including those not matched with items on IDEAS)
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