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A fractional cointegration test of purchasing power parity: the case of selected members of OPEC

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  • Abdol Soofi

Abstract

In recent years, analysts have used cointegration tests in determining whether the residuals of the purchasing power parity (PPP) model are mean-reverting. Cointegration methods, however, rest on the binary selection of the series as either stationary or integrated of degree one. This approach excludes a class of long-memory stochastic processes with a fractional differencing parameter which also have mean-reverting characteristics. Fractional cointegration method tests the mean-reverting property of a series which is based on this class of stochastic processes. This paper uses cointegration and fractional cointegration methods in determining the mean-reverting properties of the parallel market exchange rates for several members of the Organization of Petroleum Producing Countries. The Geweke and Porter-Hudak (GPH) test results suggest that the PPP models for Algeria, Ecuador, Saudi Arabia and Venezuela are fractionally cointegrated. Moreover, according to the Augmented Dickey-Fuller (ADF) test, the PPP models for all countries under study, appear not to have a cointegrating vector.

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Bibliographic Info

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

Volume (Year): 8 (1998)
Issue (Month): 6 ()
Pages: 559-566

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Handle: RePEc:taf:apfiec:v:8:y:1998:i:6:p:559-566

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Cited by:
  1. Guneratne Banda Wickremasinghe, 2004. "The Sri Lankan Rupee and Purchasing Power Parity during the Current Floating Period," International Trade, EconWPA 0406005, EconWPA.
  2. Hassler, Uwe & Marmol, Francesc & Velasco, Carlos, 2002. "Residual Log-Periodogram Inference for Long-Run-Relationships," Darmstadt Discussion Papers in Economics 37317, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  3. Saadet Kirbas Kasman & Adnan Kasman & Evrim Turgutlu, 2005. "Fisher Hypothesis Revisited: A Fractional Cointegration Analysis," Discussion Paper Series, Dokuz Eylül University, Faculty of Business, Department of Economics 05/04, Dokuz Eylül University, Faculty of Business, Department of Economics, revised 23 Nov 2005.
  4. Guneratne Banda Wickremasinghe, 2004. "Purchasing Power Parity Hypothesis in Developing Economies:Some Empirical Evidence from Sri Lanka," International Finance, EconWPA 0406005, EconWPA.
  5. Adnan Kasman & Saadet Kirbas-Kasman & Evrim Turgutlu, 2005. "Nominal and real convergence between the CEE countries and the EU: a fractional cointegration analysis," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(21), pages 2487-2500.

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