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Are there bubbles in the Sterling-dollar Exchange Rate? New evidence from Sequential ADF Tests

  • Bettendorf, Timo
  • Chen, Wenjuan
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    There has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets. Standard unit root and cointegration tests are criticized for their low power to detect rational bubbles that periodically collapse. This paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles. Our results show that explosiveness in the nominal Sterling-dollar exchange rates is fully explained by the relative prices of traded goods.

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    Paper provided by Free University Berlin, School of Business & Economics in its series Discussion Papers with number 2012/21.

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    Date of creation: 2012
    Date of revision:
    Handle: RePEc:zbw:fubsbe:201221
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    1. 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.
    2. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
    3. 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.
    4. Kenneth D. West, 1986. "A Standard Monetary Model and the Variability of the Deutschemark-DollarExchange Rate," NBER Working Papers 2102, National Bureau of Economic Research, Inc.
    5. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
    6. Charles Engel, 1995. "Accounting for U.S. Real Exchange Rate Changes," NBER Working Papers 5394, National Bureau of Economic Research, Inc.
    7. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
    8. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
    9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    10. Wu, Yangru, 1995. "Are there rational bubbles in foreign exchange markets? Evidence from an alternative test," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 27-46, February.
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