The European Exchange Rate Mechanism and the Volatility of the Sterling-Deutschemark Exchange Rate

B Pesaran and G Robinson

Economic Journal, 1993, vol. 103, issue 421, 1418-31

Abstract: Sterling membership of the ERM focused interest on the sterling-deutsche mark exchange rate, with commentators predicting a reduction in exchange rate volatility. This paper analyzes the sterling-deutsche mark rate pre- and post-ERM entry, and finds that ERM membership significantly reduced volatility. This reduction in volatility is characterized by the disappearance of ARCH effects, evident prior to ERM membership. The paper argues that the disappearance of ARCH is probably associated with a reduction in activity of speculators, particularly technical analysts. Copyright 1993 by Royal Economic Society.

Date: 1993
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