Foreign Currency Bubbles

18 Pages Posted: 21 Jun 2010  

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Philip Protter

Cornell University

Date Written: June 21, 2010

Abstract

This paper develops a new model for studying foreign currency exchange rate bubbles. The model constructed is a modification of the Martingale-based bubble approach of Jarrow, Protter, and Shimbo [12], [13]. This model generates some new insights into our understanding of exchange rate bubbles and it can be utilized empirically to test for their existence. The new insights are: (i) exchange rate bubbles can be negative, in contrast to asset price bubbles, (ii) exchange rate bubbles are caused by price level bubbles in either or both of the relevant countries’ currencies, and (iii) price level bubbles decrease the expected inflation rate in the domestic economy.

Suggested Citation

Jarrow, Robert A. and Protter, Philip, Foreign Currency Bubbles (June 21, 2010). Johnson School Research Paper Series No. 29-2010. Available at SSRN: https://ssrn.com/abstract=1628181 or http://dx.doi.org/10.2139/ssrn.1628181

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Philip Protter

Cornell University ( email )

Ithaca, NY 14853
United States

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