A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981-84

George Evans

American Economic Review, 1986, vol. 76, issue 4, 621-36

Abstract: The U.S. dollar price of the U.K. pound sterling is tested for a speculative bubble, defined as a period with a nonzero median in excessreturns. A nonparametric procedure is developed, which controls for data mining over the period of flexible exchange rates, and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981-84. Possible interpretations arebootstrap equilibria (rational bubbles), nonsym-metric fundamentals, and nonrational expectations. Copyright 1986 by American Economic Association.

Date: 1986
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