Abstract
Asset prices tend to undergo wide swings around long-run equilibrium values which can have detrimental effects on the real economy. To get a better understanding of how the fi?nancial sector and the real economy interact this paper models the long swings in the Swiss franc-US dollar foreign currency market using the I(2) Cointegrated VAR model. The results show strong evidence of self-reinforcing feedback mechanisms in the Swiss-US foreign exchange market consistent with the observed pronounced persistence in the Swiss-US parity conditions. Generally, the results provide support for models allowing expectations formation in fi?nancial markets to be based on imperfect information.
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