Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals
20 Pages Posted: 13 Feb 2006
There are 2 versions of this paper
Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals
Excess Volatility and the Asset-Pricing Exchange Rate Model With Unobservable Fundamentals
Date Written: May 1999
Abstract
This paper presents a method to test the volatility predictions of the textbook asset-pricing exchange rate model, which imposes minimal structure on the data and does not commit to a choice of exchange rate fundamentals. Our method builds on existing tests of excess volatility in asset prices, combining them with a procedure that extracts unobservable fundamentals from survey-based exchange rate expectations. We apply our method to data for the three major exchange rates since 1984 and find broad evidence of excess exchange rate volatility with respect to the predictions of the canonical asset-pricing model in an efficient market.
Keywords: Exchange Rate Volatility, Survey-based Exchange Rate Expectations
JEL Classification: F31, C22
Suggested Citation: Suggested Citation