IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Mean Reversion in G-10 Nominal Exchange Rates

Author Info

  • Sweeney, Richard J.
Registered author(s):

    Abstract

    According to conventional wisdom, industrial country floating exchange rates contain unit roots. SUR tests on panels of monthly Group of Ten (G-10) log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0.5% to 15%. On average, in out-of-sample forecasts mean reversion models beat random walks significantly in some forecast periods. For monthly data, the range of expected USD-DEM appreciation rates exceeds 15% per year in the mean reversion model. Mean reversion places strong restrictions on international models: over the sample period, the G-10 had to run monetary policies consistent with stable long-run nominal rates.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://journals.cambridge.org/abstract_S0022109000002581
    File Function: link to article abstract page
    Download Restriction: no

    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 41 (2006)
    Issue (Month): 03 (September)
    Pages: 685-708

    as
    in new window

    Handle: RePEc:cup:jfinqa:v:41:y:2006:i:03:p:685-708_00
    Contact details of provider: Postal:
    Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK

    Web page: http://journals.cambridge.org/jid_JFQ
    Email:

    Keywords:

    References listed on IDEAS
    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.:

    as in new window
    1. Stephen G. Cecchetti & Nelson C. Mark & Robert J. Sonora, 2000. "Price Level Convergence Among United States Cities: Lessons for the European Central Bank," NBER Working Papers 7681, National Bureau of Economic Research, Inc.
    2. Engel, C., 1996. "Long-Run PPP May Not Hold After All," Working Papers 96-05, University of Washington, Department of Economics.
    3. Culver, Sarah E & Papell, David H, 1997. "Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 435-44, July-Aug..
    4. Balz, Christoph, 1998. "Testing the stationarity of interest rates using a SUR approach," Economics Letters, Elsevier, vol. 60(2), pages 147-150, August.
    5. Baillie, R.T. & Bollerslev, T., 1993. "Cointegration, Fractional Cointegration, and Exchange RAte Dynamics," Papers 9103, Michigan State - Econometrics and Economic Theory.
    6. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May.
    7. Diebold, Francis X & Gardeazabal, Javier & Yilmaz, Kamil, 1994. " On Cointegration and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 727-35, June.
    8. Chinn, Menzie D. & Meese, Richard A., 1995. "Banking on currency forecasts: How predictable is change in money?," Journal of International Economics, Elsevier, vol. 38(1-2), pages 161-178, February.
    9. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
    10. Dumas, Bernard, 1990. "Performance of currency portfolios chosen by a Bayesian technique: 1967-1985," Journal of Banking & Finance, Elsevier, vol. 14(2-3), pages 539-558, August.
    11. Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, 04.
    12. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
    13. Dumas, Bernard & Solnik, Bruno, 1995. " The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-79, June.
    14. 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 167-81, March.
    15. Cornell, W Bradford & Dietrich, J Kimball, 1978. "The Efficiency of the Market for Foreign Exchange under Floating Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 111-20, February.
    16. Coakley, Jerry & Fuertes, Ana Maria, 1997. "New panel unit root tests of PPP," Economics Letters, Elsevier, vol. 57(1), pages 17-22, November.
    Full references (including those not matched with items on IDEAS)

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    as in new window


    Cited by:

    1. Chiu, Mei Choi & Wong, Hoi Ying, 2011. "Mean-variance portfolio selection of cointegrated assets," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1369-1385, August.
    2. Wong, Hoi Ying & Lo, Yu Wai, 2009. "Option pricing with mean reversion and stochastic volatility," European Journal of Operational Research, Elsevier, vol. 197(1), pages 179-187, August.
    3. Chiu, Mei Choi & Wong, Hoi Ying, 2013. "Optimal investment for an insurer with cointegrated assets: CRRA utility," Insurance: Mathematics and Economics, Elsevier, vol. 52(1), pages 52-64.
    4. Lucio Sarno & Giorgio Valente, 2009. "Exchange Rates and Fundamentals: Footloose or Evolving Relationship?," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 786-830, 06.
    5. Azad, A.S.M. Sohel, 2009. "Random walk and efficiency tests in the Asia-Pacific foreign exchange markets: Evidence from the post-Asian currency crisis data," Research in International Business and Finance, Elsevier, vol. 23(3), pages 322-338, September.
    6. Buckley, Winston S. & Long, Hongwei, 2015. "A discontinuous mispricing model under asymmetric information," European Journal of Operational Research, Elsevier, vol. 243(3), pages 944-955.
    7. Chiu, Mei Choi & Wong, Hoi Ying, 2012. "Mean–variance asset–liability management: Cointegrated assets and insurance liability," European Journal of Operational Research, Elsevier, vol. 223(3), pages 785-793.
    8. Guo, Hui & Savickas, Robert, 2008. "Forecasting foreign exchange rates using idiosyncratic volatility," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1322-1332, July.
    9. Fan, Kun & Shen, Yang & Siu, Tak Kuen & Wang, Rongming, 2014. "Pricing foreign equity options with regime-switching," Economic Modelling, Elsevier, vol. 37(C), pages 296-305.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:41:y:2006:i:03:p:685-708_00. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.