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A sequential purchasing power parity test for panels of large cross- sections and implications for investors

Westerlund, Joakim LU and Narayan, Paresh (2015) In European Journal of Finance 21(15). p.1317-1333
Abstract
In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors.
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
sequential unit root tests, real exchange rates, PPP
in
European Journal of Finance
volume
21
issue
15
pages
1317 - 1333
publisher
Taylor & Francis
external identifiers
  • wos:000359906400003
  • scopus:84938918519
  • scopus:85027933494
ISSN
1466-4364
DOI
10.1080/1351847X.2014.948216
language
English
LU publication?
yes
id
8c4aacb2-98e8-4297-8171-f261621b7506 (old id 7969231)
date added to LUP
2015-09-23 07:51:58
date last changed
2017-09-25 11:05:00
@article{8c4aacb2-98e8-4297-8171-f261621b7506,
  abstract     = {In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors.},
  author       = {Westerlund, Joakim and Narayan, Paresh},
  issn         = {1466-4364},
  keyword      = {sequential unit root tests,real exchange rates,PPP},
  language     = {eng},
  number       = {15},
  pages        = {1317--1333},
  publisher    = {Taylor & Francis},
  series       = {European Journal of Finance},
  title        = {A sequential purchasing power parity test for panels of large cross- sections and implications for investors},
  url          = {http://dx.doi.org/10.1080/1351847X.2014.948216},
  volume       = {21},
  year         = {2015},
}