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Common Stochastic Trends in a System of Exchange Rates

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  • Baillie, Richard T
  • Bollerslev, Tim

Abstract

Univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series. Furthermore, all seven spot and forward rates appear to be cointegrated, that is, the forward premiums are stationary and one common unit root, or stochastic trend, is detectable in the multivariate time series models for the seven spot and forward rates, respectively. This is consistent with the hypothesis of the seven exchange rates possessing one long-run relationship, and the disequilibrium error around that relationship, partly accounting for subsequent movements in the exchange rates. Copyright 1989 by American Finance Association.

Suggested Citation

  • Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-181, March.
  • Handle: RePEc:bla:jfinan:v:44:y:1989:i:1:p:167-81
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    References listed on IDEAS

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