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The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies

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Venus Khim-Sen Liew
Terence Tai-Leung Chong
Kian-Ping Lim

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Abstract

Utilizing the formal linearity test of Luukkonen, Saikkonen and Teräsvirta ( Biometrika , 75 , 491-99, 1998) as diagnostic tool, the empirical finding suggests that the linear autoregressive (AR) model is inadequate in describing the real exchange rates behaviour of 11 Asian economies. It is noted that the conventional battery of diagnostic tests is capable of identifying the inadequacy of the linear model in only three of these series. Moreover, the linearity nature of this behaviour has been formally rejected in favour of the non-linear smooth transition autoregressive (STAR) model. The finding of non-linearity in the data generating process of these real exchange rates warrants that the use of linear framework in empirical modelling and statistical testing procedures in the field of exchange rates may lead to an inappropriate policy conclusions.

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

Volume (Year): 35 (2003)
Issue (Month): 12 (August)
Pages: 1387-1392
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Handle: RePEc:taf:applec:v:35:y:2003:i:12:p:1387-1392

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January. [Downloadable!] (restricted)
  2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De. [Downloadable!] (restricted)
  3. Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia Pascual, 2002. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," NBER Working Papers 9393, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June. [Downloadable!] (restricted)
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  7. 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. [Downloadable!] (restricted)
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  8. Sarno, Lucio, 2000. "Real exchange rate behavior in the Middle East: a re-examination," Economics Letters, Elsevier, vol. 66(2), pages 127-136, February. [Downloadable!] (restricted)
  9. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001. [Downloadable!]
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  1. Mario Cerrato & Nick Sarantis, 2006. "Nonlinear Mean Reversion in Real Exchange Rates: Evidence from Developing and Emerging Market Economies," Economics Bulletin, Economics Bulletin, vol. 6(7), pages 1-14. [Downloadable!]
  2. Venus Khim-Sen Liew, 2003. "The Validity of PPP Revisited: An Application of Non-linear Unit Root Test," International Finance 0308001, EconWPA. [Downloadable!]
  3. Venus Khim-Sen Liew & Kian-Ping Lim & Evan Lau & Chee-Keong Choong, 2003. "Exchange Rate – Relative Price Relationship: Nonlinear Evidence from Malaysia," International Finance 0311014, EconWPA. [Downloadable!]
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  4. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, Economics Bulletin, vol. 3(33), pages 1-9. [Downloadable!]
  5. Venus Khim-Sen Liew, 2004. "Nonlinear Adjustment of ASEAN-5 Real Exchange Rates: Symmetrical or Asymmetrical?," Economics Bulletin, Economics Bulletin, vol. 6(8), pages 1-19. [Downloadable!]
  6. Venus Khim-Sen Liew & Ahmad Zubaidi Baharumshah & Kian-Ping Lim, 2003. "On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity," International Finance 0309001, EconWPA, revised 01 Nov 2004. [Downloadable!]
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  7. Liew, Venus Khim-Sen & Lee, Hock-Ann & Lim, Kian-Ping, 2005. "Purchasing power parity in Asian economies: further evidence from rank tests for cointegration," MPRA Paper 7301, University Library of Munich, Germany. [Downloadable!]
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  8. Liew, Venus Khim-Sen & Chia, Ricky Chee-Jiun & Ling, Tai-Hu, 2009. "Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian Countries," MPRA Paper 15794, University Library of Munich, Germany. [Downloadable!]
  9. Venus Khim-sen Liew & Ahmad Zubaidi Baharumshah & Terence Tai-leung Chong, 2003. "Are Asian Real Exchange Rates Stationary?," International Finance 0307002, EconWPA, revised 01 Nov 2004. [Downloadable!]
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  10. Kian-Ping Lim & Venus Khim-Sen Liew & Hock-Tsen Wong, 2003. "Weak-form Efficient Market Hypothesis, Behavioural Finance and Episodic Transient Dependencies: The Case of the Kuala Lumpur Stock Exchange," Finance 0312012, EconWPA. [Downloadable!]
  11. Venus Khim-Sen Liew & Kian-Ping Lim, 2005. "Income Divergence? Evidence of Non-linearity in the East Asian Economies," Economics Bulletin, Economics Bulletin, vol. 15(1), pages 1-7. [Downloadable!]
  12. Liew, Venus Khim-Sen & Lee, Hock-Ann & Lim, Kian-Ping & Lee, Huay-Huay, 2006. "Linearity and stationarity of South Asian real exchange rates," MPRA Paper 517, University Library of Munich, Germany. [Downloadable!]
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