Social and Behavioral Sciences Commons^™

Long Horizon Movements In Exchange Rates: Great Expectations, Minsok Pak

Honors Papers

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 …