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Mean Reversion in G-10 Nominal Exchange Rates

Published online by Cambridge University Press:  06 April 2009

Richard J. Sweeney
Richard J. Sweeney
Affiliation:
sweeneyr@msb.edu, McDonough School of Business, Georgetown University, 37th and 0 Sts. NW, Washington, DC 20057.
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Abstract

According to conventional wisdom, industrial country floating exchange rates contain unit roots. SUR tests on panels of monthly Group of Ten (G-10) log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0.5% to 15%. On average, in out-of-sample forecasts mean reversion models beat random walks significantly in some forecast periods. For monthly data, the range of expected USD-DEM appreciation rates exceeds 15% per year in the mean reversion model. Mean reversion places strong restrictions on international models: over the sample period, the G-10 had to run monetary policies consistent with stable long-run nominal rates.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 685 - 708
Copyright
Copyright © School of Business Administration, University of Washington 2006

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