Speculative bubbles and excess returns in European exchange rates. Evidence from a nonparametric approach

This paper evaluates whether excess returns on holding Deutschmarks against French Francs, Italian Liras and British Pounds have been recently characterized by (temporary) speculative bubbles. We propose a two-step, distribution-free procedure. First, nonzero-median subperiods are significantly withdrawn from the original sample by an elaborate sign test that avoids the objection of data-mining. Second, we apply the Wilcoxon rank test on all selected subsamples. All excess returns are characterized by nonzero medians, which remain significant for the Lira/DM and the Franc/DM even when adjusting for risk and for overlapping observations. Heuristically, the presence of a speculative bubble seems to be a plausible explanation for the latter two exchange rates rather than a peso problem or learning.