Measuring Convergence Speed of Asset Prices Toward a Pre-Announced Target

In this paper we examine asset price dynamics (i.e. the convergence speed) in the event of pre-announced conversion values and dates. The theoretical framework for these dynamics has been developed in De Grauwe, Dewachter and Veestraeten (1999). We examine two instances of conversion, notably the 1879-Resumption of Specie Payments in the USA and the conversion of European currencies into the Euro on January 1, 1999. In our econometric model we treat the underlying fundamentals as unobservable and estimate their evolution via a Kalman filtering technique. Estimation results reveal values for the rate or speed of convergence that are in line with intuition and amount to levels well below (implicit) estimates listed in literature.