Excess volatility of exchange rates with unobservable fundam
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Excess volatility of exchange rates with unobservable fundamentals

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"We present tests of excess volatility of exchange rates that impose minimal structure on the data and do not commit to a choice of exchange rate "fundamentals". Our method builds on existing volatility tests of asset prices, combining them with a procedure that extracts unobservable fundamentals from survey-based exchange rate expectations. We apply our method to data for the three major exchange rates since 1984 and find broad evidence of excess volatility with respect to the predictions of the canonical asset-pricing model of the exchange rate with rational expectations"--Federal Reserve Bank of New York web site.

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