Robustness and exchange rate volatility

Edouard Djeutem and Kenneth Kasa

Journal of International Economics, 2013, vol. 91, issue 1, 27-39

Abstract: This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume that agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can explain observed exchange rate volatility. We also briefly discuss the implications of robust forecasts for a number of other exchange rate puzzles.

Keywords: Volatility; Robustness; Exchange rates (search for similar items in EconPapers)
JEL-codes: D81 F31 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Working Paper: Robustness and Exchange Rate Volatility (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:91:y:2013:i:1:p:27-39

DOI: 10.1016/j.jinteco.2013.05.003

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