02287cam a22002657 4500001000600000003000500006005001700011008004100028100002000069245010800089260006600197490004100263500001700304520114400321530006101465538007201526538003601598690007001634690010501704700002101809710004201830830007601872856003701948856003601985w4834NBER20140901223611.0140901s1994 mau||||fs|||| 000 0 eng d1 aEngel, Charles.14aThe Distribution of Exchange Rates in the EMSh[electronic resource] /cCharles Engel, Craig S. Hakkio. aCambridge, Mass.bNational Bureau of Economic Researchc1994.1 aNBER working paper seriesvno. w4834 aAugust 1994.3 aExchange 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. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aF3 - International Finance2Journal of Economic Literature class. 7aF4 - Macroeconomic Aspects of International Trade and Finance2Journal of Economic Literature class.1 aHakkio, Craig S.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w4834.4 uhttp://www.nber.org/papers/w483441uhttp://dx.doi.org/10.3386/w4834