Reconsidering Cointegration in International Finance: Three Case Studies of Size Distortion in Finite Samples
AbstractThis paper reconsiders several recently published but controversial results about the behaviour of exchange rates. In particular, it explores finite-sample problems in the application of cointegration tests and shows how these may have affected the conclusions of recent research. It also demonstrates how simple simulation methods may be used to check the robustness of cointegration tests in particular applied settings, and provides information on the potential sources of size distortion in these tests. Three case studies are presented. The first is the literature on cointegration and prediction of nominal spot exchange rates spawned by Baillie and Bollerslev (1989). The second is work on the long-run validity of the monetary model of exchange rate determination, particularly the contributions of MacDonald and Taylor (1993; 1994a). The final case study looks at the evidence presented by Kasa (1992) on common stochastic trends in the international stock market. Our results suggest that Baillie and Bollerslev's results are unaffected by finite-sample problems, but that the opposite is true for the other two case studies.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 97-1.
Length: 34 pages
Date of creation: 1997
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Econometric and statistical methods;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
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