This paper investigates the real exchange rate between the German mark and the dollar for stationarity. The different tests we apply show conflicting evidence. The puzzle we resolve by introducing transaction costs that impose a range of real exchange rates to be compatible with purchasing power...

This paper estimates the monetary and the portfolio model for the dollar-mark exchange rate. It turns out that German and US bonds are imperfect substitutes and the observed exchange rate fluctuations are to a significant part due to a varying risk premium. The risk premium reflects relative...

The paper starts discussing the role of nonlinearities for the arising of risk premia in economies with only risk neutral investors. It proceeds by tests for Brownian motions, leading to a clear rejection of the hypothesis of independent and normally distributed increments in the dollar- mark...