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What is the shape of real exchange rate nonlinearity?

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  • Stephen Norman
  • Kerk Phillips

Abstract

Evidence that real exchange rate dynamics can be described using models which exhibit nonlinear mean reversion has been mounting over the past decade. This article attempts to better understand the shape of real exchange rate nonlinearity through the use of the Smooth Transition Autoregressive (STAR) model and the newly proposed skewed generalized error transition function. The advantage of this transition function it that it nests popularly used transition functions through simple parameter constraints. This allows the use of nested model selection tests. It is shown that more flexible transition functions are preferred in many cases over the commonly used exponential transition function. The results suggest that most of the real exchange rates studied in this article are better described by discrete threshold models rather than STAR models.

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File URL: http://hdl.handle.net/10.1080/09603107.2012.718066
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Bibliographic Info

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

Volume (Year): 23 (2013)
Issue (Month): 5 (March)
Pages: 363-375

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Handle: RePEc:taf:apfiec:v:23:y:2013:i:5:p:363-375

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  1. Frederique Bec & Melika Ben Salem & Marine Carrasco, 2004. "Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model," RCER Working Papers 509, University of Rochester - Center for Economic Research (RCER).
  2. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc.
  3. Walter Enders & Selahattin Dibooglu, 2001. "Long-Run Purchasing Power Parity with Asymmetric Adjustment," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 433-445, October.
  4. Theodossiou, Panayiotis & McDonald, James B. & Hansen, Christian B., 2007. "Some Flexible Parametric Models for Partially Adaptive Estimators of Econometric Models," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(7), pages 1-20.
  5. Peel, David & Sarno, Lucio & Taylor, Mark P, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles," CEPR Discussion Papers 2658, C.E.P.R. Discussion Papers.
  6. Joon Y. Park & Mototsugu Shintani, 2006. "Testing for a Unit Root against Transitional Autoregressive Models," Levine's Bibliography 321307000000000316, UCLA Department of Economics.
  7. Sollis, Robert & Leybourne, Stephen & Newbold, Paul, 2002. "Tests for Symmetric and Asymmetric Nonlinear Mean Reversion in Real Exchange Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 686-700, August.
  8. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. repec:ebl:ecbull:v:3:y:2005:i:23:p:1-11 is not listed on IDEAS
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