Stochastic Trends and Jumps in EMS Exchange Rates

In this paper we study the statistical properties of EMS exchange rate returns. Our findings show that jumps, time- varying parameters, and conditional leptokurtosis are pertinent features in the empirical distributions of EMS exchange rate returns. Allowance for fat tails, however, tends to reduce the measured frequency of jumps in the distributions to more realistic proportions. Most successful in capturing the relevant features of EMS exchange rate returns is a combined jump-GARCH model with conditionally t-distributed innovations