Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals

20 Pages Posted: 13 Feb 2006

See all articles by Leonardo Bartolini

Leonardo Bartolini

affiliation not provided to SSRN (deceased)

Lorenzo Giorgianni

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

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

Bartolini (deceased), Leonardo and Giorgianni, Lorenzo, Excess Volatility and the Asset-Pricing Exchange Rate Model with Unobservable Fundamentals (May 1999). IMF Working Paper No. 99/71, Available at SSRN: https://ssrn.com/abstract=880598

Leonardo Bartolini (deceased) (Contact Author)

affiliation not provided to SSRN (deceased)

Lorenzo Giorgianni

International Monetary Fund (IMF) ( email )

700 19th Street NW
Asia and Pacific Department
Washington, DC 20431
United States
202-623-5326 (Phone)

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