Email this article Some tests for speculative exchange rate bubbles base on unit root tests
Abstract
In this paper we conduct an indirect test for speculative bubbles in the exchange value of the currencies
of Germany and the United Kingdom relative to the U.S, dollar. Our test is general enough to include
models that either assume the validity of purchasing power parity (PPP) or arrive at a PPP-type relationship.
On the empirical side, the test is based on a unit root test appropriate for general ARMA representations
of the underlying time series. We obtain strong evidence against the presence of bubbles over the free
floating period 1974-87.
of Germany and the United Kingdom relative to the U.S, dollar. Our test is general enough to include
models that either assume the validity of purchasing power parity (PPP) or arrive at a PPP-type relationship.
On the empirical side, the test is based on a unit root test appropriate for general ARMA representations
of the underlying time series. We obtain strong evidence against the presence of bubbles over the free
floating period 1974-87.
Keywords
Exchange transaction; Econometrics
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