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Testing mean reversion in target-zone exchange rates

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Author Info
Giuseppe Cavaliere

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Abstract

The aim of the paper is to assess to what extent European Monetary System (EMS) target zone exchange rates have been characterized by mean reverting behaviour. To this purpose, a new class of mean reversion tests is introduced. With respect to standard approaches, the proposed tests -- which are based on the sample excursion of the exchange rate within the band -- have a better ability to detect target-zone mean reverting dynamics. The empirical analysis of the exchange rates among the main EMS currencies shows that the degree of mean reversion is much higher than what has been reported in the literature, both before and after the target zone widening of 1993. Finally, the proposed tests have a wider range of applications since they originate a new approach to unit root testing.

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

Volume (Year): 37 (2005)
Issue (Month): 20 (November)
Pages: 2335-2347
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Handle: RePEc:taf:applec:v:37:y:2005:i:20:p:2335-2347

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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. Lahiri, Kajal & Mamingi, Nlandu, 1995. "Testing for cointegration: Power versus frequency of observation -- another view," Economics Letters, Elsevier, vol. 49(2), pages 121-124, August. [Downloadable!] (restricted)
  2. Otero, Jesus & Smith, Jeremy, 2000. "Testing for cointegration: power versus frequency of observation -- further Monte Carlo results," Economics Letters, Elsevier, vol. 67(1), pages 5-9, April. [Downloadable!] (restricted)
  3. Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. MacKinnon, James G & Haug, Alfred A & Michelis, Leo, 1999. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 563-77, Sept.-Oct. [Downloadable!]
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  5. Phillips, Peter C B & Xiao, Zhijie, 1998. " A Primer on Unit Root Testing," Journal of Economic Surveys, Blackwell Publishing, vol. 12(5), pages 423-69, December. [Downloadable!] (restricted)
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  6. Cavaliere, Giuseppe, 2005. "Limited Time Series With A Unit Root," Econometric Theory, Cambridge University Press, vol. 21(05), pages 907-945, October. [Downloadable!]
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  7. Yoosoon Chang & Joon Park, 2002. "On The Asymptotics Of Adf Tests For Unit Roots," Econometric Reviews, Taylor and Francis Journals, vol. 21(4), pages 431-447. [Downloadable!] (restricted)
  8. Anthony, Myrvin & MacDonald, Ronald, 1998. "On the mean-reverting properties of target zone exchange rates: Some evidence from the ERM," European Economic Review, Elsevier, vol. 42(8), pages 1493-1523, September. [Downloadable!] (restricted)
  9. Giuseppe Cavaliere, 2001. "Testing the unit root hypothesis using generalized range statistics," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 39.
  10. Lucio Sarno & Mark P. Taylor, . "Real Exchange Rates under the Recent Float: Unequivocal Evidence of Mean Reversion," Economics and Finance Discussion Papers 97-14, Economics and Finance Section, School of Social Sciences, Brunel University.
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  11. Anthony, Myrvin & MacDonald, Ronald, 1999. "The width of the band and exchange rate mean-reversion: some further ERM-based results," Journal of International Money and Finance, Elsevier, vol. 18(3), pages 411-428. [Downloadable!] (restricted)
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Cited by:
(explanations, 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. J. Isaac Miller, 2008. "Testing the Bounds: Empirical Behavior of Target Zone Fundamentals," Working Papers 0803, Department of Economics, University of Missouri, revised 15 Apr 2009. [Downloadable!]
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