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An Empirical Analysis of Nonstationarity in Panels of Exchange Rates and Interest Rates with Factors

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Author Info
Hyungsik Roger Moon
Benoit Perron

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Abstract

This paper studies nonstationarities in panels of exchange rates and interest rates. For this, we survey developments in the analysis of nonstationary panels with cross-sectional dependence modeled as a factor model. We focus on panel unit root tests and on inference on the nonstationary factors. Our results suggest that PPP does not hold for our panel of 17 exchange rates due to the presence of nonstationary factors. The dominant factor has a very strong European flavor. Moreover, we find a single nonstationary factor in a panel of Canadian and U.S. interest rates of different maturities and risk. Since some of the idiosyncratic components are stationary, these series are cointegrated. The dominant factor has a level interpretation as in the term structure literature.

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Paper provided by Institute of Economic Policy Research (IEPR) in its series IEPR Working Papers with number 05.35.

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Length: 33 pages
Date of creation: Aug 2005
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Handle: RePEc:scp:wpaper:05-35

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Full references

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. Hyungsik Roger Moon & Benoit Perron & Peter C.B. Phillips, 2005. "Incidental Trends and the Power of Panel Unit Root Tests," IEPR Working Papers 05.38, Institute of Economic Policy Research (IEPR). [Downloadable!]
    Other versions:
  2. Tommaso Mancini-Griffoli & Laurent L. Pauwels, 2006. "Is There a Euro Effect on Trade? An Application of End-of-Sample Structural Break Tests for Panel Data," HEI Working Papers 04-2006, Economics Section, The Graduate Institute of International Studies, revised Apr 2006. [Downloadable!]
  3. Donggyu Sul, 2005. "New Panel Unit Root Tests under Cross Section Dependence for Practitioners," Econometrics 0506010, EconWPA. [Downloadable!]
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