Mean reversion and structural breaks in real exchange rates: South African evidence
AbstractThe paper tests for mean reversion, that is, purchasing power parity (PPP), in the bilateral real exchange rate series of the South African rand against those of the dollar, the pound sterling, the euro and the yen, these being the currencies of the country's main trading partners. The relevance of considering structural breaks in PPP tests is demonstrated. Using standard unit root tests without considering structural breaks, one is unable to reject the null hypothesis of a unit root in the exchange rate series. The additive outlier model clearly demonstrates the importance of multiple sudden structural breaks and supports the stationarity of the rand's bilateral real exchange rates. As expected the innovative outlier model, which seeks to suggest gradual shifts, only identifies a limited number of breaks and does not support mean reversion.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 16 (2006)
Issue (Month): 4 ()
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Web page: http://www.tandfonline.com/RAFE20
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- Chang, Tsangyao & Tzeng, Han-Wen, 2011. "Long-run purchasing power parity with asymmetric adjustment: Further evidence from nine transition countries," Economic Modelling, Elsevier, vol. 28(3), pages 1383-1391, May.
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- Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
- Maxym Chaban, 2010. "Cointegration analysis with structural breaks and deterministic trends: an application to the Canadian dollar," Applied Economics, Taylor & Francis Journals, vol. 42(23), pages 3023-3037.
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