TY - JOUR
AU - SOLNIK, BRUNO
AB -  THE PURPOSE OF THIS note is to illustrate how tests of exchange rate models can be conducted using financial prices rather than macroeconomic data. All empirical tests of exchange rate models have met with limited success so far.' A major problem encountered is the poor quality of the macroeconomic data used. Most of the data suffer from large measurement error or cannot even be measured directly. For example, these models often require measures of changes in expected real activity or in monetary policy; such variables can only be poorly estimated from time-series models on industrial production or money supply. The innovation in this paper is to use financial prices such as stock prices instead of the traditional macroeconomic data. There exists convincing empirical evidence that stock returns forecast changes in economic activity as measured by industrial production, real growth in GNP, employment rate, or corporate profits (Fama [5] and Geske and Roll [8]). In the domestic context, stock prices have been used to test the relation between economic activity and inflation (e.g., Fama [5], Geske and Roll [8], and Solnik [12]). In the same spirit, stock returns are used in this paper as proxies for changes in economic 
TI - Using Financial Prices to Test Exchange Rate Models: A Note
JF - The Journal of Finance
DO - 10.1111/j.1540-6261.1987.tb02555.x
DA - 1987-03-01
UR - https://www.deepdyve.com/lp/wiley/using-financial-prices-to-test-exchange-rate-models-a-note-CtmCJtBMfT
SP - 141
VL - 42
IS - 1
DP - DeepDyve
ER -