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Testing for a unit root in ERM exchange rates in the presence of structural breaks: evidence from the bootstrap

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  • Angelos Kanas

Abstract

This paper explores the extent to which accounting for structural breaks in ERM exchange rates affects inferences on the presence of a unit root in these exchange rates. Four ERM exchange rates, found by previous empirical studies to be nonstationary, are examined. In contrast to previous empirical studies, multiple structural breaks are allowed for to account for multiple realignments in the central parities of these exchange rates. Bootstrapped critical values, personalized to the pattern of breaks of each exchange rate, are used for statistical inference. Consistent with the theoretical conclusion by Froot and Obstfeld (1991), the results suggest that all four ERM exchange rates are stationary. Therefore, accounting for breaks in ERM exchange rates does affect inferences on the presence of a unit root in these exchange rates.

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  • Angelos Kanas, 1998. "Testing for a unit root in ERM exchange rates in the presence of structural breaks: evidence from the bootstrap," Applied Economics Letters, Taylor & Francis Journals, vol. 5(7), pages 407-410.
  • Handle: RePEc:taf:apeclt:v:5:y:1998:i:7:p:407-410 DOI: 10.1080/135048598354519
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    Cited by:

    1. Hui, Cho-Hoi & Lo, Chi-Fai & Fong, Tom Pak-Wing, 2016. "Swiss franc's one-sided target zone during 2011–2015," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 54-67.
    2. Kyongwook Choi & Eric Zivot, 2003. "Long Memory and Structural Changes in the Forward Discount: An Empirical Investigation," EERI Research Paper Series EERI_RP_2003_02, Economics and Econometrics Research Institute (EERI), Brussels.
    3. Leung, Tin Cheuk & Tsang, Kwok Ping, 2013. "Anchoring and loss aversion in the housing market: Implications on price dynamics," China Economic Review, Elsevier, pages 42-54.
    4. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    5. Cho-Hoi Hui & Chi-Fai Lo, 2008. "A Note on Estimating Realignment Probabilities -- A First-Passage-Time Approach," Working Papers 0809, Hong Kong Monetary Authority.
    6. Hans Genberg & Cho-hoi Hui, 2009. "The Credibility of the Link from the Perspective of Modern Financial Theory," Working Papers 0902, Hong Kong Monetary Authority.
    7. Cho-Hoi Hui & Chi-Fai Lo & Po-Hon Chau, 2017. "Can Exchange Rate Dynamics in Krugman¡¯s Target-zone Model be Directly Tested?Abstract: Despite Krugman's (1991) model being a benchmark for modelling target zones, empirical support has been sparse d," Working Papers 032017, Hong Kong Institute for Monetary Research.
    8. C. H. Hui & C. F. Lo & V. Yeung & L. Fung, 2008. "Valuing foreign currency options with a mean-reverting process: a study of Hong Kong dollar," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 118-134.
    9. Genberg, Hans & Hui, Cho-Hoi, 2008. "The credibility of 'The Link' from the perspective of modern financial theory," IMFS Working Paper Series 18, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    10. Lo, C.F. & Hui, C.H. & Fong, T. & Chu, S.W., 2015. "A quasi-bounded target zone model — Theory and application to Hong Kong dollar," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 1-17.

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