
Explosive dynamics in exchange rates
Explosiveness in financial markets means that prices display exponential growth. In recent years statistical tests have been developed to locate mildly explosive bubble periods in real time. In conjunction with judgment on underlying fundamentals they help detecting price distortions. A new paper shows how tests for explosiveness can be applied to exchange rates. The tests suggest that developed market currencies have recurrently experienced episodes of explosive behaviour, reaching from a few days to up to three months. Currency level changes seem to reverse subsequently. Periods of explosiveness since 2000 have often been related to the U.S. dollar and financial market volatility.