Cointegrated Periodically Collapsing Bubbles in the Exchange Rate of “BRICS”

Wilfredo Maldonado (), Octavio Augusto Tourinho and Jorge A. B. M. de Abreu

Emerging Markets Finance and Trade, 2018, vol. 54, issue 1, 54-70

Abstract: We test the occurrence of periodically recurring rational bubbles in the exchange rate of each of the “BRICS” countries currency relative to the US dollar. The forward exchange rate is used as a proxy for the expected exchange rate, different Purchasing Parity Power (PPP)-based rules for the fundamental exchange rate are considered, and its initial value is endogenously determined. For the chosen model, the regime switching equation satisfactorily fits the data, confirming the presence of rational bubbles for all countries. The dynamics of the exchange rate series for each country is interpreted with the help of the estimated bubbles. The bubbles are compared across countries, found to be cointegrated, and this is interpreted as evidence of the international transmission of exchange rate shocks between these countries.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:54:y:2018:i:1:p:54-70

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DOI: 10.1080/1540496X.2016.1229179

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