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This paper uses graphical techniques and multinomial logit analysis to evaluate the causes and consequences of episodes of turbulence in foreign exchange markets. Using a quarterly panel of data from 1959 through 1993 for twenty OECD countries, we consider the antecedents and aftermath of devaluations and revaluations, flotations, fixings, and speculative attacks (which may not be successful). We find that realignments of fixed exchange rates are alike: devaluations are preceded by political instability, budget and current account deficits and fast growth of money, and prices. Revaluations are mirror images of devaluations. These movements are largely consistent with the standard speculative attack model. In contrast, few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables. Transitions between exchange rate regimes are largely idiosyncratic, and are neither consistently provoked ex ante by systematic imbalances, nor typically justified ex post by subsequent changes in policy. We conclude that there are no clear early warning signals of many speculative attacks, and no easy solutions for policy-makers.

Derman and Kani~1994!, Dupire~1994!, and Rubinstein~1994! hypothesize that asset return volatility is a deterministic function of asset price and time, and develop a deterministic volatility function~DVF! option valuation model that has the potential of fitting the observed cross section of option prices exactly. Using S&P 500 options from June 1988 through December 1993, we examine the predictive and hedging performance of the DVF option valuation model and find it is no better than an ad hoc procedure that merely smooths Black-Scholes~1973! implied volatilities across exercise prices and times to expiration. EXPECTED FUTURE VOLATILITY PLAYS a central role in finance theory. Consequently, accurately estimating this parameter is crucial to meaningful financial decision making. Finance researchers generally rely on the past behavior of asset prices to develop expectations about volatility, documenting movements in volatility as they relate to prior volatility and0or variables

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