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Explaining the European exchange rates deviations: Long memory or non-linear adjustment?

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  • Dufrénot, Gilles
  • Lardic, Sandrine
  • Mathieu, Laurent
  • Mignon, Valérie
  • Péguin-Feissolle, Anne

Abstract

The standard macroeconomic view links the equilibrium level of foreign exchange rates to the state of the macroeconomic fundamentals. Any deviation from the equilibrium level is viewed as temporary since there are forces ensuring quickly mean-reverting dynamics. The aim of this article is to investigate whether the empirical observation of the real exchange rate misalignments in five European countries over the period 1979-1999 was consistent with the hypothesis of temporary deviations from the fundamentals, or whether they must be associated with significant persistent dynamics. We depart from the traditional framework of linear cointegration by using fractional cointegration or non-linear cointegration. Therefore, we will try to discriminate between linear long memory dynamics and non-linear short memory dynamics.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 18 (2008)
Issue (Month): 3 (July)
Pages: 207-215

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Handle: RePEc:eee:intfin:v:18:y:2008:i:3:p:207-215

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  1. Lo, Andrew W. (Andrew Wen-Chuan), 1989. "Long-term memory in stock market prices," Working papers 3014-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Gilles DUFRENOT & Laurent MATHIEU & Val=E9rie MIGNON & Anne PEGUIN-FEISSOLE, 2003. "Persistent misalignments of the European exchanges rates: some evidence from nonlinear cointegration," International Finance 0309003, EconWPA.
  3. KIRMAN, Alan & TEYSSIÈRE, Gilles, 2002. "Bubbles and long-range dependence in asset prices volatilities," CORE Discussion Papers 2002060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Alvaro Escribano & Oscar Jorda, . "Improved Testing And Specification Of Smooth Transition Regression Models," Department of Economics 97-26, California Davis - Department of Economics.
  5. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  6. Emmanuel Dubois & Sandrine Lardic & Valérie Mignon, 2004. "The Exact Maximum Likelihood-Based Test for Fractional Cointegration: Critical Values, Power and Size," Computational Economics, Society for Computational Economics, vol. 24(3), pages 239-255, July.
  7. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  8. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  9. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
  10. Peter B. Clark & Ronald MacDonald, 2000. "Filtering the Beer," IMF Working Papers 00/144, International Monetary Fund.
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Cited by:
  1. Aloy, Marcel & Boutahar, Mohamed & Gente, Karine & Péguin-Feissolle, Anne, 2011. "Purchasing power parity and the long memory properties of real exchange rates: Does one size fit all?," Economic Modelling, Elsevier, vol. 28(3), pages 1279-1290, May.
  2. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2013. "Long Memory and Fractional Integration in High Frequency Data on the US Dollar / British Pound Spot Exchange Rate," CESifo Working Paper Series 4224, CESifo Group Munich.
  3. López Villavicencio, Antonia, 2008. "Nonlinearities or outliers in real exchange rates?," Economic Modelling, Elsevier, vol. 25(4), pages 714-730, July.
  4. Marçal, Emerson Fernandes, 2013. "Exchange rate misalignments, interdependence, crises, and currency wars: an empirical assessment," Textos para discussão 348, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  5. Mensi, Walid & Hammoudeh, Shawkat & Yoon, Seong-Min, 2014. "Structural breaks and long memory in modeling and forecasting volatility of foreign exchange markets of oil exporters: The importance of scheduled and unscheduled news announcements," International Review of Economics & Finance, Elsevier, vol. 30(C), pages 101-119.
  6. Béreau, Sophie & Villavicencio, Antonia López & Mignon, Valérie, 2010. "Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling," Economic Modelling, Elsevier, vol. 27(1), pages 404-416, January.
  7. Slim Chaouachi & Zied Ftiti & Frédèric Teulon, 2014. "Modelling the Real Exchange Rate: A new Sequential Approach," Working Papers 2014-390, Department of Research, Ipag Business School.
  8. de Truchis, Gilles & Keddad, Benjamin, 2013. "Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 394-412.
  9. Rob Ackrill and Simeon Coleman, 2012. "Inflation dynamics in central and eastern European countries," Working Papers 2012/01, Nottingham Trent University, Nottingham Business School, Economics Division.
  10. Antonia López-Villavicencio & Valérie Mignon, 2009. "On Equilibrium Exchange Rates: Is Emerging Asia Different?," Working Papers 2009-38, CEPII research center.
  11. Mohamed Boutahar & Gilles Dufrénot & Anne Péguin-Feissolle, 2008. "A Simple Fractionally Integrated Model with a Time-varying Long Memory Parameter d t ," Computational Economics, Society for Computational Economics, vol. 31(3), pages 225-241, April.
  12. Slim Chaouachi & Zied Ftiti & Frederic Teulon, 2014. "Explaining the Tunisian Real Exchange: Long Memory versus Structural Breaks," Working Papers 2014-147, Department of Research, Ipag Business School.

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