Testing long‐run PPP with infinite‐variance returns

Falk, Barry; Wang, Chun-Hsuan

doi:10.1002/jae.711

Cited by 19 publications

(32 citation statements)

References 25 publications

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“…When we apply the partially adaptive test to these series, we rejected the unit root hypothesis in real GNP, supporting the literature of transitory uctuations about trend. We were unable to reject the null of unit root in real exchange rates, implying that, as reported in Falk and Wang (2003), the purchasing power parity hypothesis may not hold in the long run even if tail heaviness are accounted for. We also found no evidence against unit root in nominal interest rate, which supports the ndings in Rose (1988) and raises doubt about economic results predicted by the CCAPM and optimal monetary policy models.…”

Section: Introductioncontrasting

confidence: 53%

“…For example, the 7 Three-month and twelve-month Treasury Bill Rate: Board of Governors of the Federal Reserve System, http://www.stls.frb.org/fred/ 8 The data were pre-whitened using the deterministic speci cation and number of lags shown in table 9. presence of unit root in RER implies that PPP hypothesis does not hold in the long run even if we account for heavy tails in real exchange rates. In a recent paper, Falk and Wang (2003) reached the same conclusion by considering the effects of fat tails on critical values of cointegrating tests. In particular, they nd that the Johansen´s likelihood-ratio based test are less supportive of PPP when Gaussianbased critical values are replaced by heavy-tailed-based critical values.…”

Section: Nominal Interest Rate and Real Exchange Ratementioning

confidence: 56%

“…Traditional OLS-based tests, such as the ADF test, cannot reject the unit root hypothesis in these series. On the other hand, non-Gaussian behavior in interest rate, real exchange rate, and real GNP has been largely reported in the literature as being caused by asymmetric innovations or presence of outliers (e.g., Falk and Wang, 2003;Blanchard and Watson, 1986;Bidarkota, 2000;Balke and Fomby, 1994;and Scheinkman and LeBaron, 1989). A descriptive analysis of our data also con rms that U.S. nominal interest rate, real GNP, and real exchange rate are featured with nonGaussian characteristics.…”

Section: Introductionmentioning

confidence: 98%

See 2 more Smart Citations

Testing Unit Root Based on Partially Adaptive Estimation

Lima¹,

Zhang²

2010

Journal of Time Series Econometrics

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This paper proposes unit root tests based on partially adaptive estimation. The proposed tests provide an intermediate class of inference procedures that are more efficient than the traditional OLS-based methods and simpler than unit root tests based on fully adaptive estimation using nonparametric methods. Taking into account the well documented characteristic of heavy-tail behavior in economic and financial data, we consider unit root tests coupled with a class of partially adaptive M-estimators based on the student-t distributions, which includes the normal distribution as a limiting case. Monte Carlo experiments indicate that, in the presence of heavy tail distributions, the proposed test is more powerful than the traditional ADF test. We apply the proposed test to several macroeconomic time series that have heavy-tailed distributions. The unit root hypothesis is rejected in U.S. real GNP, supporting the literature of transitory shocks in output. However, evidence against unit root is not found in real exchange rate and nominal interest rate even when heavy-tail is taken into account.

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Section: Introductioncontrasting

confidence: 53%

Section: Nominal Interest Rate and Real Exchange Ratementioning

confidence: 56%

Section: Introductionmentioning

confidence: 98%

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Testing Unit Root Based on Partially Adaptive Estimation

Lima¹,

Zhang²

2010

Journal of Time Series Econometrics

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“…The validity of the PPP hypothesis has generated a great deal of controversy, intimately related to the type of method applied. Recently, Falk and Wang (2003) found that PPP hypothesis holds against some economies but not for all. Their work is based on Caner's (1998) concept of cointegration where the VECM errors follow a stable distribution.…”

Section: An Empirical Applicationmentioning

confidence: 99%

“…We use the same data as Falk and Wang (2003), downloaded from the Journal of Applied Econometrics data archive website. The domestic country is the US and the bilateral relationship of study is with Canada, France, Germany, Italy, Japan, and the U.K..…”

Section: An Empirical Applicationmentioning

confidence: 99%

Time-Varying Cointegration

2010

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In this paper we propose a time-varying vector error correction model in which the cointegrating relationship varies smoothly over time. The Johansen setup is a special case of our model. A likelihood ratio test for time-invariant cointegration is defined and its asymptotic chi-square distribution is derived. We apply our test to the purchasing power parity hypothesis of international prices and nominal exchange rates, and we find evidence of time-varying cointegration.

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Strong orthogonal decompositions and non‐linear impulse response functions for infinite‐variance processes

Hill

2006

Can J Statistics

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Abstract:The author proves that Wold-type decompositions with strong orthogonal prediction innovations exist in smooth, reflexive Banach spaces of discrete time processes if and only if the projection operator generating the innovations satisfies the property of iterations. His theory includes as special cases all previous Wold-type decompositions of discrete time processes, completely characterizes when non-linear heavy-tailed processes obtain a strong-orthogonal moving average representation, and easily promotes a theory of non-linear impulse response functions for infinite-variance processes. The author exemplifies his theory by developing a non-linear impulse response function for smooth transition threshold processes, and discusses how to test decomposition innovations for strong orthogonality and whether the proposed model represents the best predictor. A data set on currency exchange rates allows him to illustrate his methodology. Decompositions orthogonales fortes et fonctions reponses a impulsion non lineaire pour des processus a variance infinieR6ssumi : L'auteur ddmontre que pour qu'un espace de Banach dflexif lisse de processus ti temps discret admette une dkomposition de type Wold 21 innovations prkvisionnelles fortement oahogonales, il faut et il suffit que I'op6rateur projectif engendrant les innovations posshle la propriktk d'itdrations. Son rdsultat. qui englobe comme cas particuliers toutes les ddcompositions de type Wold obtenues antdrieurement pour des processus ti temps discret, caractkrise complktement les situations oil les processus non lindaires ti queues lourdes possMent une reprdsentation en moyenne mobile fortement orthogonale, en plus de conduire naturellement ti une thdorie des fonctions rdponses ti impulsion non linkaire pour les processus ti variance infinie. Il se sert de cette thdorie pour ddvelopper une fonction ti impulsion non lindaire pour des processus ti seuil de transition lisse et montre comment tester I'orthogonalitk forte des innovations de la dkcomposition et vkrifier si le modkle proposk est be1 et bien le meilleur pr6dicteur. Un jeu de donnks sur des taux de change de devises lui permet d'illustrer son propos.

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Testing long‐run PPP with infinite‐variance returns

Cited by 19 publications

References 25 publications

Testing Unit Root Based on Partially Adaptive Estimation

Testing Unit Root Based on Partially Adaptive Estimation

Time-Varying Cointegration

Strong orthogonal decompositions and non‐linear impulse response functions for infinite‐variance processes

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