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A non-parametric analysis of ERM exchange rate fundamentals

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  • José Torres

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Abstract

In this paper we present evidence concerning the number of common stochastic trends in three major ERM exchange rates. The results indicate the presence of a single common trend driving these currencies and from this we suggest that the common trend can be considered as the ERM non-parametric fundamentals for the three selected currencies. Using a non-parametric technique, the Alternating Conditional Expectations (ACE) algorithm, we obtain evidence of the existence of non-linearities for two out of three currencies with a functional form, related to the estimated non-parametric fundamentals, close to the S-shape given by the basic target zone model.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 32 (2007)
Issue (Month): 1 (April)
Pages: 67-84

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Handle: RePEc:spr:empeco:v:32:y:2007:i:1:p:67-84

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Keywords: Exchange rate fundamentals; Target zones; Common trends; ACE algorithm; F31;

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  10. Taylor, Mark P. & Iannizzotto, Matteo, 2001. "On the mean-reverting properties of target zone exchange rates: a cautionary note," Economics Letters, Elsevier, vol. 71(1), pages 117-129, April.
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  12. Ma, Yue & Kanas, Angelos, 2000. "Testing for nonlinear Granger causality from fundamentals to exchange rates in the ERM," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 69-82, January.
  13. Meese, Richard A & Rose, Andrew K, 1991. "An Empirical Assessment of Non-linearities in Models of Exchange Rate Determination," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 603-19, May.
  14. Kasa, Kenneth, 1992. "Common stochastic trends in international stock markets," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 95-124, February.
  15. Jong, F.C.J.M. de, 1994. "A univariate analysis of EMS exchange rates using a target zone model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-384515, Tilburg University.
  16. de Jong, F, 1994. "A Univariate Analysis of EMS Exchange Rates Using a Target Zone Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(1), pages 31-45, Jan.-Marc.
  17. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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