Rate of return parity and currency crises in experimental asset markets

Jason Childs

Journal of International Financial Markets, Institutions and Money, 2009, vol. 19, issue 1, 157-170

Abstract: This paper explores the impact of exchange rate uncertainty on the predictive power of rate of return parity in a laboratory environment, extending the work of Fisher and Kelly [Fisher, E.O., Kelly, F.S., 2000. Experimental foreign exchange markets. Pacific Economic Review 5, 365-388] and Childs and Mestelman [Childs, J., Mestelman, S., 2006. Rate of return parity in experimental asset markets. Review of International Economics 14, 331-347]. While these works use unchanging exchange rates, this paper allows for a change in the exchange rate between laboratory currencies. The data indicate rate of return parity is weakened by the potential for a currency crisis. The results also indicate that currency crises can be caused by self-fulfilling prophecies and that the level of reserves with which a fixed exchange rate is defended impacts the timing of a crisis but does not significantly change the likelihood of a currency crisis.

Keywords: Currency; crisis; Rate; of; return; parity; Experiment (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:19:y:2009:i:1:p:157-170

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