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Bivariate cointegration of major exchange rates, cross-market efficiency and the introduction of the Euro

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  • Kühl, Michael

Abstract

The aim of this paper is to investigate whether the Euro-US dollar exchange rate cointegrates with other major exchange rates since the introduction of the Euro. In order to evaluate whether the introduction of a new currency, which has commonly replaced more and less established currencies, has generated common stochastic trends which are possibly linked to cross-inefficient markets, the results are compared with those of a cointegration analysis of the pre-Euro era. We can show that after the introduction of the Euro two cointegration relationships arise among the Euro-US dollar and the four most important exchange rates, whereas the no-arbitrage condition is satisfied. Here, we discovered a new result: free floating exchange rates are cointegrated after the introduction of the Euro. The Euro-US dollar exchange rate cointegrates with the Australian dollar-US dollar and with the British pound-US dollar. In both cases the Euro-US dollar is weakly exogenous. The results coincide with comovements of important fundamentals which imply cross-market efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 62 (2010)
Issue (Month): 1 (January)
Pages: 1-19

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Handle: RePEc:eee:jebusi:v:62:y:2010:i:1:p:1-19

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

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Keywords: Foreign exchange market; Market efficiency; Cointegration;

References

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Cited by:
  1. Ciner, Cetin, 2011. "Information transmission across currency futures markets: Evidence from frequency domain tests," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 134-139, June.

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