Speculative bubbles and excess returns in European exchange rates. Evidence from a nonparametric approach

Andrea Bobula and Giuseppe De Arcangelis

No 23, Working Papers in Public Economics from Department of Economics and Law, Sapienza University of Roma

Abstract: This paper evaluates whether excess returns on holding Deutschmarks against French Francs, Italian Liras and British Pounds have been recently characterized by (temporary) speculative bubbles. We propose a two-step, distribution-free procedure. First, nonzero-median subperiods are significantly withdrawn from the original sample by an elaborate sign test that avoids the objection of data-mining. Second, we apply the Wilcoxon rank test on all selected subsamples. All excess returns are characterized by nonzero medians, which remain significant for the Lira/DM and the Franc/DM even when adjusting for risk and for overlapping observations. Heuristically, the presence of a speculative bubble seems to be a plausible explanation for the latter two exchange rates rather than a peso problem or learning.

Keywords: Sign Test; Wilcoxon Rank Test; Efficiency Market Hypothesis; Monte Carlo Experiment; Risk Premium; Peso Problem. (search for similar items in EconPapers)
Pages: 41
Date: 1997-06
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