Exchange Rate Dynamics Revisited: A Panel Data Test of the Fractional Integration Order
(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:
https://lup.lub.lu.se/record/4659507
- author
- Andersson, Fredrik N G LU
- organization
- publishing date
- 2014
- 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
- 2016-04-01 14:08:36
- date last changed
- 2022-01-27 23:01:15
@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}},
keywords = {{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}},
doi = {{10.1007/s00181-013-0740-3}},
volume = {{47}},
year = {{2014}},
}