Regime Switching as a Test for Exchange Rate Bubbles

Simon van Norden ()

Econometrics from EconWPA

Abstract: This paper develops a new test for speculative bubbles, which is applied to data for the Japanese yen, the German mark and the Canadian dollar exchange rates from 1977 to 1991. The test assumes that bubbles display aparticular kind of regime-switching behaviour, which is shown to imply coefficient restrictions on a simple switching-regression model of exchange rate innovations. Test results are sensitive to the specification of exchange rate fundamentals and other factors. Evidence most consistent with the bubble hypothesis is found using an overshooting model of the Canadian dollar and a PPP model of the Japanese yen.

JEL-codes: C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 1995-02-07, Revised 1995-08-09
Note: 59 pages. Postscript file compressed in a Info-zip archive, then uuencoded.
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Related works:
Journal Article: Regime Switching as a Test for Exchange Rate Bubbles (1996)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpem:9502001

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