Measuring convergence speed of asset prices toward a pre-announced target

Hans Dewachter and Dirk Veestraeten

Applied Financial Economics, 2001, vol. 11, issue 6, 591-601

Abstract: This study examines asset price dynamics (i.e. the convergence speed) in the event of pre-announced conversion values and dates. The theoretical framework for these dynamics has been developed in De Grauwe et al. (1999). Two instances of conversion are examined, notably the 1879-Resumption of Specie Payments in the USA and the conversion of European currencies into the Euro on 1 January, 1999. In the econometric model the underlying fundamentals are treated as unobservable and their evolution is estimated via a Kalman filtering technique. Estimation results reveal values for the rate or speed of convergence that are in line with intuition and amount to levels well below (implicit) estimates listed in the literature.

Date: 2001
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Working Paper: Measuring Convergence Speed of Asset Prices Toward a Pre-Announced Target (1999)
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DOI: 10.1080/096031001753266885

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