Abstract
This paper investigates the implications for the volatility of exchange rates of specifying market uncertainty as parameter uncertainty. Private agents learn by means of Bayes rule about a parameter of the stochastic process generating the exogenous variables. Learning is shown to magnify the reaction of exchange rates to random shocks to the ‘market fundamentals’. This magnification effect of learning can explain the rejections of the econometric tests on the variance bounds and on the absence of bubbles that have been reported in the literature.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
