Degree Year

1991

Document Type

Thesis

Degree Name

Bachelor of Arts

Department

Economics

Advisor(s)

Wooheon Rhee

Keywords

Exchange, Rates, Change

Abstract

Results in this paper show that applying specific techniques designed to analyze long run behavior of time series variables provides evidence that long run movements in exchange rates differ from random walks. Long run behavior, for both the DM/$ and Y/$ spot rates, exhibit a rather substantial mean reverting component, a temporary component similar to that found in stock prices (Fama and French [1988]; Poterba and Summers [1988]). That is to say, a divergence of observed market values from fundamental values cannot simply be interpreted as support for models of inefficient markets. Rather, these divergences may be temporary swings away from fundamental values. Over some range, these swings are eliminated and values return to their mean. Such temporary swings and their subsequent reversion to the mean can be translated into the statistical hypothesis that exchange rates contain a slowly decaying stationary (or transitory) component. With such a transitory series, the effects of a given shock are reversed over time.

Included in

Economics Commons

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