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Speculative bubbles and excess returns in European exchange rates. Evidence from a nonparametric approach

Author

Listed:
  • Andrea Bobula
  • Giuseppe De Arcangelis
Abstract
This paper evaluates whether excess returns on holding Deutschmarks against French Francs, Italian Liras and British Pounds have been recently characterized by (temporary) speculative bubbles. We propose a two-step, distribution-free procedure. First, nonzero-median subperiods are significantly withdrawn from the original sample by an elaborate sign test that avoids the objection of data-mining. Second, we apply the Wilcoxon rank test on all selected subsamples. All excess returns are characterized by nonzero medians, which remain significant for the Lira/DM and the Franc/DM even when adjusting for risk and for overlapping observations. Heuristically, the presence of a speculative bubble seems to be a plausible explanation for the latter two exchange rates rather than a peso problem or learning.

Suggested Citation

  • Andrea Bobula & Giuseppe De Arcangelis, 1997. "Speculative bubbles and excess returns in European exchange rates. Evidence from a nonparametric approach," Working Papers in Public Economics 23, Department of Economics and Law, Sapienza University of Roma.
  • Handle: RePEc:sap:wpaper:wp23
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    References listed on IDEAS

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