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Excess Volatility of Realized Excess Profit from Currency Speculation in a Two-Country General Equilibrium Model

Donggyu Sul ()

Review of International Economics, 1999, vol. 7, issue 2, 280-96

Abstract: This paper examines whether the Lucas model can explain stylized facts in foreign exchange markets, by employing Monte Carlo studies. It is assumed that changes in the logarithms of endowments and of money supplies follow a multivariate Markov switching process. From the results of the Monte Carlo studies, with plausible values of the preference parameters, the excess volatility of the realized excess profit from currency speculation, the strong autocorrelation of the forward premium in the sample can be found in the model for four exchange rates. However, the implied covariance between the forward premium and depreciation rates is positive. Copyright 1999 by Blackwell Publishing Ltd.

Date: 1999
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