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Testing for a unit root in ERM exchange rates in the presence of structural breaks: evidence from the bootstrap

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  • Angelos Kanas
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    Abstract

    This paper explores the extent to which accounting for structural breaks in ERM exchange rates affects inferences on the presence of a unit root in these exchange rates. Four ERM exchange rates, found by previous empirical studies to be nonstationary, are examined. In contrast to previous empirical studies, multiple structural breaks are allowed for to account for multiple realignments in the central parities of these exchange rates. Bootstrapped critical values, personalized to the pattern of breaks of each exchange rate, are used for statistical inference. Consistent with the theoretical conclusion by Froot and Obstfeld (1991), the results suggest that all four ERM exchange rates are stationary. Therefore, accounting for breaks in ERM exchange rates does affect inferences on the presence of a unit root in these exchange rates.

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    File URL: http://www.informaworld.com/openurl?genre=article&doi=10.1080/135048598354519&magic=repec&7C&7C8674ECAB8BB840C6AD35DC6213A474B5
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

    Volume (Year): 5 (1998)
    Issue (Month): 7 ()
    Pages: 407-410

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    Handle: RePEc:taf:apeclt:v:5:y:1998:i:7:p:407-410

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    Cited by:
    1. C. H. Hui & C. F. Lo & V. Yeung & L. Fung, 2008. "Valuing foreign currency options with a mean-reverting process: a study of Hong Kong dollar," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 118-134.
    2. Cho-Hoi Hui & Chi-Fai Lo, 2008. "A Note on Estimating Realignment Probabilities -- A First-Passage-Time Approach," Working Papers 0809, Hong Kong Monetary Authority.
    3. C. F. Lo & C. H. Hui & S. W. Chu & T. Fong, 2012. "A Quasi-Bounded Target Zone Model - Theory and Application to Hong Kong Dollar," Working Papers 282012, Hong Kong Institute for Monetary Research.
    4. Hans Genberg & Cho-hoi Hui, 2009. "The Credibility of the Link from the Perspective of Modern Financial Theory," Working Papers 0902, Hong Kong Monetary Authority.
    5. Kyongwook Choi & Eric Zivot, 2003. "Long Memory and Structural Changes in the Forward Discount: An Empirical Investigation," EERI Research Paper Series EERI_RP_2003_02, Economics and Econometrics Research Institute (EERI), Brussels.

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