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Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?

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  • Ko, Hsiu-Hsin
  • Ogaki, Masao

Abstract

We use a residual-based bootstrap method to re-examine the finding of the Granger causality relation from exchange rates to fundamentals in Engel and West (2005), in which the relation is taken as evidence for their explanation for the present-value model for exchange rates. Our test results are against the previous findings. The Monte Carlo experiment results suggest that the previous evidence for the causality relation from exchange rates to fundamentals is very likely caused by the size distortion. Hence, the existing Granger causality evidence is not strong enough to validate the new explanation for the present-value model.

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  • Ko, Hsiu-Hsin & Ogaki, Masao, 2015. "Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 198-206.
    • Handle: RePEc:eee:reveco:v:38:y:2015:i:c:p:198-206
    DOI: 10.1016/j.iref.2015.02.016
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    5. Pincheira, Pablo & Hardy, Nicolas, 2018. "The predictive relationship between exchange rate expectations and base metal prices," MPRA Paper 89423, University Library of Munich, Germany.
    6. Michał Chojnowski & Piotr Dybka, 2017. "Is Exchange Rate Moody? Forecasting Exchange Rate with Google Trends Data," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 2(1), pages 1-21, June.
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    8. Ko, Hsiu-Hsin & Ogaki, Masao, 2015. "Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 198-206.
    9. Adhitya Wardhono & Badara Shofi Dana & M.Abd. Nasir, 2017. "Rethinking the exchange rate disconnect puzzle theory in ASEAN-6," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 9(1), pages 98-103, April.
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    More about this item

    Keywords

    Exchange rates; Fundamentals; Granger causality; Bootstrap test;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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