Common stochastic trends in a system of exchange rates

Article Abstract:

Univariate tests reveal strong evidence for the presence of a unit root in the univariate time-series representation for seven daily spot and forward exchange rate series. Furthermore, all seven spot and forward rates appear to be cointegrated; that is, the forward premiums are stationary, and one common unit root, or stochastic trend, is detectable in the multivariate time-series models for the seven spot and forward rates, respectively. This is consistent with the hypothesis that the seven exchange rates possess one long-run relationship and that the disequilibrium error around the relationship partly accounts for subsequent movements in the exchange rates. (Reprinted by permission of the publisher.)

Stochastic analysis

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The exchange rate in the presence of transaction costs: implications for tests of purchasing power parity

Article Abstract:

With transaction costs for trading goods, the nominal exchange rate moves within a band around the nominal purchasing power parity (PPP) value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below-unity- slope coefficients in regression tests of PPP, and why these increase toward unity under hyperinflation or with low-frequency data. Our results are independent of the presence of nontraded goods in the economy. (Reprinted by permission of the publisher.)

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Deviations from Purchasing Power Parity in the Long Run

Article Abstract:

Deviations from purchasing power parity are found to be consistent during both flexible and fixed exchange rates Violations of purchasing power parity occurs both in the long- and short-run. The findings are consistent with the Martingale Model.

Evaluation

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