This study provides evidence of periodically collapsing bubbles in the British pound to US dollar exchange rate in the post-1973 period. We develop two- and three-state regime-switching models that relate the expected exchange rate return to the bubble size and to an additional explanatory...

A Markov-switching model is fit for eighteen exchange rates at quarterly and monthly frequencies. This model fits well in-sample at the quarterly frequency for many exchange rates. By the mean-squared-error or mean-absolute-error criterion. the Markov model does not generate superior forecasts...

We first show that the recent success of modern macroeconomic models in forecasting nominal exchange rates, evaluated using the Clark and West (2006) inference procedure, is in part due to the presence of the constant term (drift) in addition to the economic fundamentals. We then model the...