2012-08-01
Model uncertainty and exchange rate volatility
Publication
Publication
International Economic Review , Volume 53 - Issue 3 p. 815- 844
This article proposes an explanation for shifts in the volatility of exchange-rate returns. Agents are uncertain about the true data generating model and deal with this uncertainty by making inference on the models and their parameters' approach, I call model learning. Model learning may lead agents to focus excessively on a subset of fundamental variables. Consequently, exchange-rate volatility is determined by the dynamics of these fundamentals and changes as agents alter models. I investigate the empirical relevance of model learning and find that the change in volatility of GBP/USD in 1993 was triggered by a shift between models.
Additional Metadata | |
---|---|
doi.org/10.1111/j.1468-2354.2012.00702.x, hdl.handle.net/1765/38143 | |
ERIM Article Series (EAS) | |
International Economic Review | |
Organisation | Erasmus Research Institute of Management |
Markiewicz, A. (2012). Model uncertainty and exchange rate volatility. International Economic Review, 53(3), 815–844. doi:10.1111/j.1468-2354.2012.00702.x |