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Long-Run purchasing Power Parity and Mean Reversion in Real Exchange Rates: A Further Assessment


  • Tronzano, Marco

    () (Università degli Studi di Genova, Dipartimento di Economia e Metodi Quantitativi)


The paper tests purchasing-power-parity as a long-run equilibrium condition, focusing on bilateral exchange rates between the dollar, the mark, and the yen. The sample consists of quarterly data ranging from 1955 to 1990. Differently from most previous work’s, a preliminary data investigation is performed, to seek for eventual deterministic trends which might seriously affect empirical findings from co integration analysis. Furthermore, since unit-root test have typically a low power against interesting stationary alternative, they are supplemented with a different methodology relying upon a variance-ratio approach. Overal1, long-run purchasing-power-parity is not supported by data considering mark/dollar and yen/dollar rates, while an opposite conclusion is drawn for the yen/mark exchange rate. This result appears to be robust to alternative research strategies.

Suggested Citation

  • Tronzano, Marco, 1992. "Long-Run purchasing Power Parity and Mean Reversion in Real Exchange Rates: A Further Assessment," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 45(1), pages 77-100.
  • Handle: RePEc:ris:ecoint:0467

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    References listed on IDEAS

    1. Harrison Hong & Jeremy C. Stein, 2003. "Differences of Opinion, Short-Sales Constraints, and Market Crashes," Review of Financial Studies, Society for Financial Studies, vol. 16(2), pages 487-525.
    2. Mark Mitchell & Todd Pulvino & Erik Stafford, 2002. "Limited Arbitrage in Equity Markets," Journal of Finance, American Finance Association, vol. 57(2), pages 551-584, April.
    3. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    4. Allen F. & Morris S. & Postlewaite A., 1993. "Finite Bubbles with Short Sale Constraints and Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 61(2), pages 206-229, December.
    5. Jarrow, Robert A, 1980. " Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices," Journal of Finance, American Finance Association, vol. 35(5), pages 1105-1113, December.
    6. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    7. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
    8. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    9. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    10. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    11. Boehme, Rodney D. & Danielsen, Bartley R. & Sorescu, Sorin M., 2006. "Short-Sale Constraints, Differences of Opinion, and Overvaluation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 455-487, June.
    12. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
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    Cited by:

    1. Mariam Camarero & Cecilio Tamarit, 1996. "Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC," Open Economies Review, Springer, vol. 7(1), pages 61-76, January.
    2. Amalia Zumaquero & Rodrigo Urrea, 2002. "Purchasing Power Parity: Error Correction Models and Structural Breaks," Open Economies Review, Springer, vol. 13(1), pages 5-26, January.

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