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The confusing time-series behaviour of real exchange rates: Are asymmetries important?

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  • McMillan, David G.
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    Abstract

    Evidence regarding the time-series properties of real exchange rates is mixed. There is evidence that such rates exhibit both non-stationary and stationary behaviour. The current dominant belief is that rates are non-linear stationary, however, this is not accepted without question. This paper re-examines the time-series properties of five US dollar real exchange rates and argues that the confusing time-series properties arise largely as each series examined exhibits periods of non-stationary and stationary behaviour such that the sample over which any empirical exercise is conducted is of importance. However, extending a typical non-linear model used within the literature to allow for asymmetries improves the models ability to fit the data. Therefore, our results suggest that modelling asymmetries between positive and negative real exchange rate deviations is of importance, whereas extant research has typically rules out asymmetry. Indeed a forecasting exercise conducted over a 1-year horizon is particularly supportive of this model. Such a finding is of importance not only for academics but also finance practitioners involved in trading and portfolio management and finance managers who act in the foreign exchange market for goods market trading. It remains for future research to theoretically motivate the asymmetries found here.

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    Bibliographic Info

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

    Volume (Year): 19 (2009)
    Issue (Month): 4 (October)
    Pages: 692-711

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    Handle: RePEc:eee:intfin:v:19:y:2009:i:4:p:692-711

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    Web page: http://www.elsevier.com/locate/intfin

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    Keywords: Real exchange rates Non-linear ESTR Asymmetry;

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    Cited by:
    1. Adelina Gschwandtner & Michael Hauser, 2013. "Profit Persistence and Stock Returns," Studies in Economics 1320, Department of Economics, University of Kent.
    2. Kia, Amir, 2013. "Determinants of the real exchange rate in a small open economy: Evidence from Canada," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 163-178.
    3. Grossmann, Axel & McMillan, David G., 2010. "Forecasting exchange rates: Non-linear adjustment and time-varying equilibrium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 436-450, October.
    4. Axel Grossmann & Marc Simpson & Teofilo Ozuna, 2014. "Investigating the PPP hypothesis using constructed U.S. dollar equilibrium exchange rate misalignments over the post-bretton woods period," Journal of Economics and Finance, Springer, vol. 38(2), pages 235-268, April.

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