Distributional properties of EMS and non‐EMS exchange rates before and after German reunification

Abstract

AbstractThe paper explores the stochastic behaviour of four EMS (Belgian franc, French franc, Spanish peseta and Italian lira) and non‐EMS (Canadian dollar, US dollar, Japanese yen and British pound) deutschemark exchange rates, using a GARCH‐type model along with the generalized error distribution, before and after Germany's unification in 1990. The results indicate that there was a fundamental change in the distributions of all exchange rates after Germany's reunification and so the single normal distribution assumption is not appropriate. Although the presence of GARCH remained, all rates' conditional distributions resembled the uniform, in the first period, but they approximated the double exponential in the second. Further, during and after the pound's brief and the lira's longer associations with the ERM their distributions were unchanged. Finally, two other notable results were the reduction in the degree of volatility persistence in all Deutschemark rates during the after‐unification period, and the rates' strong mean‐reverting tendencies. Copyright © 2002 John Wiley & Sons, Ltd.