NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Distribution of Exchange Rates in the EMS

Charles Engel, Craig S. Hakkio

NBER Working Paper No. 4834 (Also Reprint No. r2084)
Issued in August 1994
NBER Program(s):   IFM

Exchange rates of currencies in the Exchange Rate Mechanism of the EMS are characterized by long periods of stability interrupted by periods of extreme volatility. The periods of volatility appear at times of realignments of the central parities and at times when the exchange rate is within the ERM bands. We begin by considering a procedure for finding outliers based on measuring distance as a quadratic form. The evidence suggests that the exchange rates of the EMS can be described by a mixture of two distributions. We therefore model the exchange rate as switching between two distributions--one that holds in stable times and the other that holds in volatile times. In particular, we use Hamilton's Markov-switching model. In addition, we extend Hamilton's model by allowing the probability of switching from one state to another to depend on the position of the exchange rate within its EMS band. This model has the interesting implication that near the edge of the band, large movements--either realignments or large jumps to the center of the band--are more likely if the move to the edge of the band has been precipitous.

download in pdf format
   (264 K)

email paper

This paper is available as PDF (264 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4834

Published: International Journal of Finance and Economics, Vol. 1, pp. 55-67. 1996. citation courtesy of

Users who downloaded this paper also downloaded these:
Campa, Chang, and Reider w6179 Implied Exchange Rate Distributions: Evidence from OTC Option Markets
Sindelar, Fletcher, Falba, Keenan, and Gallo w13715 Impact of First Occupation on Health at Older Ages
Andersen, Bollerslev, Diebold, and Labys w6961 The Distribution of Exchange Rate Volatility
Engel w4210 Can the Markov Switching Model Forecast Exchange Rates?
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us