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Re-examining Cointegration, Unit Roots and Efficiency in Foreign Exchange Rates

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  • John P. Lajaunie

    (Associate Professor of Finance in the Department of Economics and Finance, Nicholls State University, Thiboduax, LA,)

  • Atsuyuki Naka
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    Abstract

    This paper examines the cointegrating relationships in seven foreign exchange rates for a sample period from 1974 to 1991 by utilizing Johansen's (1991) method. Three subperiods are also examined to confirm the intertemporal stability of the test results. In addition, subgroups of the seven exchange rates are analyzed to determine the consistency of the empirical results with respect to different dimensions in the system. We find that the test results are sensitive to the choice of test statistics, time trends, subperiods as well as subgroups. All results indicate either one or no cointegrating relationship exists. Further, we study time series properties of twenty one cross-currency rates and the corresponding exchange rates in terms of a common currency. None of cross-currency rates are stationary and hence the pairs of exchange rates are not cointegrated. Copyright Blackwell Publishers Ltd 1997.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 24 (1997-04)
    Issue (Month): 3 ()
    Pages: 363-374

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    Handle: RePEc:bla:jbfnac:v:24:y:1997-04:i:3:p:363-374

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. Aroskar, Raj & Sarkar, Salil K. & Swanson, Peggy E., 2004. "European foreign exchange market efficiency: Evidence based on crisis and noncrisis periods," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 333-347.
    2. Kühl, Michael, 2007. "Cointegration in the foreign exchange market and market efficiency since the introduction of the Euro: Evidence based on bivariate cointegration analyses," Center for European, Governance and Economic Development Research Discussion Papers 68, University of Goettingen, Department of Economics.
    3. Kühl, Michael, 2010. "Bivariate cointegration of major exchange rates, cross-market efficiency and the introduction of the Euro," Journal of Economics and Business, Elsevier, vol. 62(1), pages 1-19, January.
    4. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
    5. Kang, Heejoon, 2008. "The cointegration relationships among G-7 foreign exchange rates," International Review of Financial Analysis, Elsevier, vol. 17(3), pages 446-460, June.

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