Betting on the EMS

Kees Koedijk and Clemens Kool

Open Economies Review, 1993, vol. 4, issue 2, 173 pages

Abstract: Two speculative strategies within the European Monetary System are empirically evaluated. The potential profitability of speculating on a currency's devaluation at a realignment crucially depends on being able to predict timing and magnitude of the parity change. Such opportunity has been eliminated from the system since 1983. For the reverse strategy of “borrowing low, investing high,” the evidence since 1983 suggests significant profitable opportunities for the weaker EMS countries — Belgium, Denmark, France and Italy — unconditional on knowledge of the timing of realignments. We conclude that this is due to a “peso problem” type of premium. Copyright Kluwer Academic Publishers 1993

Keywords: efficient markets; fixed exchange rate systems; realignments; peso problem (search for similar items in EconPapers)
Date: 1993
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DOI: 10.1007/BF01000517

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