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Periodically Collapsing Rational Bubbles in Exchange Rates: A Markov-Switching Analysis for a Sample of Industrialised Markets

Jose Eduardo de A. Ferreira

Studies in Economics from School of Economics, University of Kent

Abstract: This paper investigates the presence of periodically collapsing rational bubbles in exchange rates for a sample of industrialised countries. A periodically collapsing rational bubble is defined as an explosive deviation from economic fundamentals with distinct expansion and contraction phases in finite time. By using Markov-switching regime models we were not able to find robust evidence of a bubble driving the exchange rate away from fundamentals. Moreover, the results also revealed significant non-linearities and different regimes. The importance of these findings suggests that linear monetary models may not be appropriate to examine exchange rate movements.

Keywords: Foreign Exchange; Bubbles; Fundamentals; Markov-Switching; Assets (search for similar items in EconPapers)
JEL-codes: F31 F37 F41 (search for similar items in EconPapers)
Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-ets, nep-fmk and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:ukc:ukcedp:0604

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