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Exchange Rate Dynamics Revisited: A Panel Data Test of the Fractional Integration Order

Andersson, Fredrik N G LU (2014) In Empirical Economics 47(2). p.389-409
Abstract
We test the possibility that exchange rates from nine developed countries have a unit root against the alternate possibility that they are fractionally integrated. Theoretically, exchange rates are only expected to follow a random walk under restrictive assumptions. However, most traditional unit root tests cannot reject a unit root in exchange rates, and time series tests that allow for fractional integration have given inconclusive results. To increase the power of the test of the integration order we develop two panel data tests of the fractional integration order. Monte Carlo simulations show that these tests are correctly sized and have relatively high power compared to other similar tests. Moreover, our empirical results show that we... (More)
We test the possibility that exchange rates from nine developed countries have a unit root against the alternate possibility that they are fractionally integrated. Theoretically, exchange rates are only expected to follow a random walk under restrictive assumptions. However, most traditional unit root tests cannot reject a unit root in exchange rates, and time series tests that allow for fractional integration have given inconclusive results. To increase the power of the test of the integration order we develop two panel data tests of the fractional integration order. Monte Carlo simulations show that these tests are correctly sized and have relatively high power compared to other similar tests. Moreover, our empirical results show that we can reject a unit root in exchange rates with a high probability, but the integration order is close to one. This indicates that exchange rates are mean-reverting, although the reversion is slow, resulting in long swings. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Nominal exchange rates, Panel data, Fractional integration, Long memory
in
Empirical Economics
volume
47
issue
2
pages
389 - 409
publisher
Physica Verlag
external identifiers
  • wos:000339971300001
  • scopus:84905381660
ISSN
0377-7332
DOI
10.1007/s00181-013-0740-3
language
English
LU publication?
yes
id
b323d912-559e-4853-a52c-44b289856460 (old id 4659507)
date added to LUP
2013-09-24 15:06:34
date last changed
2017-01-01 06:04:59
@article{b323d912-559e-4853-a52c-44b289856460,
  abstract     = {We test the possibility that exchange rates from nine developed countries have a unit root against the alternate possibility that they are fractionally integrated. Theoretically, exchange rates are only expected to follow a random walk under restrictive assumptions. However, most traditional unit root tests cannot reject a unit root in exchange rates, and time series tests that allow for fractional integration have given inconclusive results. To increase the power of the test of the integration order we develop two panel data tests of the fractional integration order. Monte Carlo simulations show that these tests are correctly sized and have relatively high power compared to other similar tests. Moreover, our empirical results show that we can reject a unit root in exchange rates with a high probability, but the integration order is close to one. This indicates that exchange rates are mean-reverting, although the reversion is slow, resulting in long swings.},
  author       = {Andersson, Fredrik N G},
  issn         = {0377-7332},
  keyword      = {Nominal exchange rates,Panel data,Fractional integration,Long memory},
  language     = {eng},
  number       = {2},
  pages        = {389--409},
  publisher    = {Physica Verlag},
  series       = {Empirical Economics},
  title        = {Exchange Rate Dynamics Revisited: A Panel Data Test of the Fractional Integration Order},
  url          = {http://dx.doi.org/10.1007/s00181-013-0740-3},
  volume       = {47},
  year         = {2014},
}