Exchange rate determination: evidence from intertemporal asset pricing and a structural var model, for three currencies

Abstract

This paper makes uses the methodology of intertemporal asset pricing in order to assess the determinats
of three currencies, the Greek drachma, the Deutsche mark and the Feench franc. The explanatory
power of the model is assessed in terms of its forecasting capacity against certain competitive models. The
results seem to support the superiority of a random walk model only in markets that have not developed a
deep foreign exchange market, e.g., Greece. In addition, structural Vector Autoregressive (SVAR) techniques
—in conjunction, with the model show that consumption shocks seem to dominate price and
monetary shocks in Greece. By contrast, in the cases of Germany and France, monetary and price shocks
play the leading role in explaining exchange rate movements.