A Re-examination of the Fragility of Evidence from Cointegration- Based Tests of Foreign Exchange Market Efficiency
AbstractWe re-examine Sephton and Larsen's (1991) conclusion that cointegration-based tests for market efficiency suffer from temporal instability. We improve upon their research by i) including a drift term in the vector error correction model (VECM) in the Johansen procedure, ii) correcting the likelihood ratio test statistic for finite-sample bias, and iii) fitting the model over longer data sets. We show that instability of the Johansen cointegration tests mostly disappears after accounting for these two factors. The evidence is even more stable in favor of no cointegration when we apply our analysis to longer data sets.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 311..
Length: 25 pages
Date of creation: 01 Feb 1996
Date of revision:
Publication status: published, Applied Financial Economics, 1997, 7:635-643.
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Web page: http://fmwww.bc.edu/EC/
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cointegration; foreign exchange; market efficiency;
Other versions of this item:
- John Barkoulas & Christopher Baum, 1997. "A re-examination of the fragility of evidence from cointegration-based tests of foreign exchange market efficiency," Applied Financial Economics, Taylor and Francis Journals, vol. 7(6), pages 635-643.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
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