Excess Volatility of Exchange Rates with Unobservable Fundamentals

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Staff Reports

Excess Volatility of Exchange Rates with Unobservable Fundamentals

April 2000 Number 103

JEL classification: F31, C22

Authors: Leonardo Bartolini, Lorenzo Giorgianni

We present tests of excess volatility of exchange rates that impose minimal structure on the data and do not commit to a choice of exchange rate "fundamentals." Our method builds on existing volatility tests of 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 volatility with respect to the predictions of the canonical asset-pricing model of the exchange rate with rational expectations.

Available only in PDF PDF

27 pages / 1,764 kb

For a published version of this report, see Leonardo Bartolini and Lorenzo Giorgianni, "Excess Volatility of Exchange Rates with Unobservable Fundamentals," Review of International Economics 9, no. 3 (August2001): 518-30.

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