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Robustness and exchange rate volatility

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  • Djeutem, Edouard
  • Kasa, Kenneth

Abstract

This paper studies exchange rate volatility within the context of the monetary model of exchange rates. We assume that agents regard this model as merely a benchmark, or reference model, and attempt to construct forecasts that are robust to model misspecification. We show that revisions of robust forecasts are more volatile than revisions of nonrobust forecasts, and that empirically plausible concerns for model misspecification can explain observed exchange rate volatility. We also briefly discuss the implications of robust forecasts for a number of other exchange rate puzzles.

Suggested Citation

  • Djeutem, Edouard & Kasa, Kenneth, 2013. "Robustness and exchange rate volatility," Journal of International Economics, Elsevier, vol. 91(1), pages 27-39.
    • Handle: RePEc:eee:inecon:v:91:y:2013:i:1:p:27-39
    DOI: 10.1016/j.jinteco.2013.05.003
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    5. Phornchanok Cumperayot & Casper G. de Vries, 2006. "Large Swings in Currencies driven by Fundamentals," Tinbergen Institute Discussion Papers 06-086/2, Tinbergen Institute.
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    7. Chou, Yu-Hsi, 2018. "Understanding the sources of the exchange rate disconnect puzzle: A variance decomposition approach," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 267-287.
    8. Djeutem, Edouard, 2014. "Model uncertainty and the Forward Premium Puzzle," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 16-40.

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    More about this item

    Keywords

    Volatility; Robustness; Exchange rates;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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