Fundamental Volatility is Regime Specific

NRG Working Paper No. 06-04

36 Pages Posted: 21 Apr 2006

See all articles by Ivo J.M. Arnold

Ivo J.M. Arnold

Nyenrode University; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2006

Abstract

A widely held notion holds that freely floating exchange rates are excessively volatile when judged against fundamentals and when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar is chosen as the numeraire currency. We also argue, and indeed demonstrate, that in cross-regime comparisons one has to account for certain "missing variables" which compensate for the fundamental variables' volatility under fixed rates.

Keywords: Exchange rates, Exchange rate regimes, Excess volatility

Suggested Citation

Arnold, Ivo J.M. and MacDonald, Ronald R. and De Vries, Casper, Fundamental Volatility is Regime Specific (January 2006). NRG Working Paper No. 06-04, Available at SSRN: https://ssrn.com/abstract=896706 or http://dx.doi.org/10.2139/ssrn.896706

Ivo J.M. Arnold (Contact Author)

Nyenrode University ( email )

3621 BG Breukelen
Netherlands
+31-346-291270 (Phone)
+31-346-291250 (Fax)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Ronald R. MacDonald

University of Strathclyde in Glasgow - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom
+44 141 548 3861 (Phone)

Government of New Zealand - Department of Economics

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New Zealand

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Casper De Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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