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A Cointegration Analysis of Purchasing Power Parity and Country Risk

Author

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  • Su-Yin Cheng

    (Department of Finance, National Chung Cheng University, Taiwan)

  • Jong-Shin Wei

    (Department of International Business, Wenzao Ursuline College of Languages, Taiwan)

  • Han Hou

    (Department of Finance, National Chung Cheng University, Taiwan)

Abstract

This paper examines purchasing power parity (PPP) for 61 countries using the panel cointegration method developed by Westerlund (2007). After controlling for cross-sectional dependence, the results show that weak PPP is stronger for Latin American countries and for countries with moderate country risk, defined in terms of political, economic, and financial components, with direct or indirect implications for the validity of PPP. Compared with a single country characteristic that might affect PPP as suggested in the literature, country risk captures more information for explaining the validity of the PPP hypothesis.

Suggested Citation

  • Su-Yin Cheng & Jong-Shin Wei & Han Hou, 2008. "A Cointegration Analysis of Purchasing Power Parity and Country Risk," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 7(3), pages 199-211, December.
    • Handle: RePEc:ijb:journl:v:7:y:2008:i:3:p:199-211
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    Cited by:

    1. Su, Chi-Wei & Tsangyao, Chang & Chang, Hsu-Ling, 2011. "Purchasing power parity for fifteen Latin American countries: Stationary test with a Fourier function," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 839-845, October.
    2. He, Huizhen & Chou, Ming Che & Chang, Tsangyao, 2014. "Purchasing power parity for 15 Latin American countries: Panel SURKSS test with a Fourier function," Economic Modelling, Elsevier, vol. 36(C), pages 37-43.

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    More about this item

    Keywords

    purchasing power parity; country risk; panel cointegration; cross-sectional dependence;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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