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Testing long-run PPP with infinite-variance returns

Author

Listed:
  • Barry Falk

    (Department of Economics, Iowa State University, USA)

  • Chun-Hsuan Wang

    (Department of Finance, Ming Chuan University, Taiwan)

Abstract

This paper investigates the long-run purchasing power parity hypothesis when exchange rate returns and inflation rates are assumed to be heavy-tailed stochastic processes. More specifically, residual-based and likelihood-ratio-based cointegration tests of PPP that explicitly allow for infinite-variance innovations are applied to monthly data (1973:1-1999:12) for Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. Our test results are marginally less supportive of PPP when the innovations are assumed to be infinite-variance, α-stable processes. Copyright © 2003 John Wiley & Sons, Ltd.

Suggested Citation

  • Barry Falk & Chun-Hsuan Wang, 2003. "Testing long-run PPP with infinite-variance returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 471-484.
    • Handle: RePEc:jae:japmet:v:18:y:2003:i:4:p:471-484
    DOI: 10.1002/jae.711
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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    Cited by:

    1. Jungjun Choi & In Choi, 2016. "Maximum Likelihood Estimation of Autoregressive Models with a Near Unit Root and Cauchy Errors," Working Papers 1612, Research Institute for Market Economy, Sogang University.
    2. Serttas, Fatma Ozgu, 2010. "Essays on infinite-variance stable errors and robust estimation procedures," ISU General Staff Papers 201001010800002742, Iowa State University, Department of Economics.
    3. Pierre Perron & Eduardo Zorita & Iliyan Georgiev & Paulo M. M. Rodrigues & A. M. Robert Taylor, 2017. "Unit Root Tests and Heavy-Tailed Innovations," Journal of Time Series Analysis, Wiley Blackwell, vol. 38(5), pages 733-768, September.
    4. repec:eee:reveco:v:49:y:2017:i:c:p:211-222 is not listed on IDEAS

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