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Can Long Horizon Data Beat Random Walk Under Engel-West Explanation?

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  • Jian Wang

    (University of Wisconsin, Madison)

Abstract

Engel and West (2004a) provide an explanation to reconcile the random walk behavior of exchange rate and linear present value asset pricing models. In this paper, we study the long horizon property of exchange rate under Engel-West explanation. It is found that the long horizon data can not significantly improve our chance of beating random walk. This result is consistent with recent empirical studies on the long horizon exchange rate. Under E-W explanation, the change of exchange rate can be more serially correlated in the long horizon data, but this change in most cases is only marginal. Depending on the persistence of change in fundamentals, two patterns may exist between the autocorrelation of exchange rate change and the time horizon. Both of these two patterns are found existing in the real data of exchange rates. These results support E-W explanation for exchange rate puzzle.

Suggested Citation

  • Jian Wang, 2005. "Can Long Horizon Data Beat Random Walk Under Engel-West Explanation?," International Finance 0501002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0501002
    Note: Type of Document - pdf; pages: 32
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Foreign exchange rate; present-value models; exchange rate and fundamentals; random walk;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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