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Half-lives of currencies and aggregation bias

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  • Kunkler, Michael
  • MacDonald, Ronald

Abstract

We revisit the exchange rate half-life issue and demonstrate that observed half-lives can be reduced significantly by modelling (relative) currency rates, rather than exchange rates. We show that the average observed half-life for relative currency rates, around a measure of central tendency, is about 1.55 years and this drops to 1.30 years when the US dollar is excluded. We also show that a standard exchange rate model exhibits aggregation bias.

Suggested Citation

  • Kunkler, Michael & MacDonald, Ronald, 2015. "Half-lives of currencies and aggregation bias," Economics Letters, Elsevier, vol. 135(C), pages 58-60.
    • Handle: RePEc:eee:ecolet:v:135:y:2015:i:c:p:58-60
    DOI: 10.1016/j.econlet.2015.07.030
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Engel, Charles & Hendrickson, Michael K. & Rogers, John H., 1997. "Intranational, Intracontinental, and Intraplanetary PPP," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 480-501, December.
    3. Charles Engel & Nelson C. Mark & Kenneth D. West, 2015. "Factor Model Forecasts of Exchange Rates," Econometric Reviews, Taylor & Francis Journals, vol. 34(1-2), pages 32-55, February.
    4. Mahieu, Ronald & Schotman, Peter, 1994. "Neglected common factors in exchange rate volatility," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 279-311, July.
    5. Lee, Kevin C & Pesaran, M Hashem & Pierse, Richard G, 1990. "Testing for Aggregation Bias in Linear Models," Economic Journal, Royal Economic Society, vol. 100(400), pages 137-150, Supplemen.
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    Cited by:

    1. Kunkler, Michael & MacDonald, Ronald, 2018. "Decomposition of the uncovered equity parity correlation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 44-58.
    2. Kunkler, Michael & MacDonald, Ronald, 2019. "The multilateral relationship between oil and G10 currencies," Energy Economics, Elsevier, vol. 78(C), pages 444-453.
    3. Kunkler, Michael, 2021. "Currency hedging for single-currency equity portfolios: Does cross-asset risk matter?," Global Finance Journal, Elsevier, vol. 49(C).
    4. Kunkler, Michael, 2022. "Using the Special Drawing Right in the Frankel-Wei regression framework," Finance Research Letters, Elsevier, vol. 46(PB).
    5. Kenneth W. Clements & Jiawei Si & Hai Long Vo, 2023. "The Law of One Food Price," Open Economies Review, Springer, vol. 34(1), pages 195-216, February.
    6. Kunkler, Michael, 2023. "A stable aggregate currency revisited: Highlighting some fundamental issues," Economics Letters, Elsevier, vol. 231(C).
    7. Kunkler, Michael, 2023. "Multilateral exchange rates: A multivariate regression framework," Journal of Economics and Business, Elsevier, vol. 125.
    8. Nagayasu, Jun, 2021. "Causal and frequency analyses of purchasing power parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 71(C).
    9. Kunkler, Michael & MacDonald, Ronald, 2016. "Idiosyncratic variation of the US Dollar," Economics Letters, Elsevier, vol. 144(C), pages 7-9.
    10. Kunkler, Michael, 2022. "Hedging local currency risk with precious metals," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    11. Kunkler, Michael, 2021. "The Chinese renminbi's co-movement with the US dollar: Addressing the numéraire issue," Finance Research Letters, Elsevier, vol. 40(C).

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    More about this item

    Keywords

    Half-lives; Exchange rates; Aggregation bias;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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