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Robustness and Exchange Rate Volatility

This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can easily explain observed exchange rate volatility.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp12-01.pdf
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp12-01.

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Length: 22
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:sfu:sfudps:dp12-01
Contact details of provider: Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Order Information: Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Web: http://www.sfu.ca/economics/research/publications.html Email:


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