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

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  • Chen, Wenjuan
  • Bettendorf, Timo

Abstract

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.

Suggested Citation

  • Chen, Wenjuan & Bettendorf, Timo, 2013. "Are There Bubbles in the Sterling-dollar Exchange Rate? New Evidence from Sequential ADF Tests," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80002, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc13:80002
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    More about this item

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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