Excess Volatility of Exchange Rates with Unobservable Fundamentals

Welfare and excess volatility of exchange rates

Volatility in Foreign Exchange Rates

Four foreign exchange spot rate series, recorded on an hourly basis for a six-month period in 1986 are examined. A seasonal GARCH model is developed to describe the time-dependent volatility apparent in the percentage nominal return of each currency. Hourly patterns in volatility are found to be remarkably similar across currencies and appear to be related to the opening and closing of the worl...

The Excess Volatility of Foreign Exchange Rates: Statistical Puzzle or Theoretical Artifact?∗

The inability to reconcile observed levels of foreign exchange rate volatility with predictions derived from rational expectations models represents one of the most persistent challenges in international finance. This paper shows that such excess volatility puzzles arise from informational assumptions by contrasting exchange rate equilibria under different expectational paradigms: rational expe...

Nonlinear prediction of exchange rates with monetary fundamentals

This paper employs a neural network (NN) to study the nonlinear predictability of exchange rates for four currencies at the 1-, 6and 12-month forecast horizons. We find that our neural network model with market fundamentals cannot beat the random walk (RW) in out-of-sample forecast accuracy, although it occasionally shows a limited market-timing ability. The neural network model without monetar...

Exchange rates and fundamentals under adaptive learning

This paper studies a monetary model that is standard in all respects except that market participants have incomplete knowledge about the economic structure and employ adaptive learning rules to learn about the economic environment. Market participants also must contend with unannounced regime shifts. Simulation results suggest that the models under adaptive learning, especially constant-gain le...