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Empirical Modeling of Exchange Rate Dynamics (Paperback, Softcover reprint of the original 1st ed. 1988)
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Empirical Modeling of Exchange Rate Dynamics (Paperback, Softcover reprint of the original 1st ed. 1988)
Series: Lecture Notes in Economics and Mathematical Systems, 303
Expected to ship within 10 - 15 working days
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Structural exchange rate modeling has proven extremely difficult
during the recent post-1973 float. The disappointment climaxed with
the papers of Meese and Rogoff (1983a, 1983b), who showed that a
"naive" random walk model distinctly dominated received theoretical
models in terms of predictive performance for the major dollar spot
rates. One purpose of this monograph is to seek the reasons for
this failure by exploring the temporal behavior of seven major
dollar exchange rates using nonstructural time-series methods. The
Meese-Rogoff finding does not mean that exchange rates evolve as
random walks; rather it simply means that the random walk is a
better stochastic approximation than any of their other candidate
models. In this monograph, we use optimal model specification
techniques, including formal unit root tests which allow for trend,
and find that all of the exchange rates studied do in fact evolve
as random walks or random walks with drift (to a very close
approximation). This result is consistent with efficient asset
markets, and provides an explanation for the Meese-Rogoff results.
Far more subtle forces are at work, however, which lead to
interesting econometric problems and have implications for the
measurement of exchange rate volatility and moment structure. It is
shown that all exchange rates display substantial conditional
heteroskedasticity. A particularly reasonable parameterization of
this conditional heteroskedasticity, which captures the observed
clustering of prediction error variances, is developed in Chapter
2.
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