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Deviations and mean reversion to purchasing power parity in the Asian currency crisis of 1997

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  • Alipasha Razzaghipour
  • Grant Fleming
  • Richard Heaney

Abstract

This study analyses the process of mean reversion towards purchasing power parity (PPP) for a sample of Asian countries around the 1997 crisis. It is found that appreciation relative to PPP is evident prior to the 1997 crash period. Correction occurs from 1997 onwards, a period marked by extreme movements in exchange rates with both appreciation and depreciation relative to the PPP rate over relatively short periods. The key result of this paper is that although reversion towards PPP is apparent for mean, though not statistically significant, it is clear that there is a substantial, statistically significant change in variance from 1997 onwards. This result has implications both for economic modelling of crash periods and for appropriate choice of statistical tests.

Suggested Citation

  • Alipasha Razzaghipour & Grant Fleming & Richard Heaney, 2001. "Deviations and mean reversion to purchasing power parity in the Asian currency crisis of 1997," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1093-1100.
  • Handle: RePEc:taf:applec:v:33:y:2001:i:9:p:1093-1100
    DOI: 10.1080/00036840121709
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    References listed on IDEAS

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    1. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part I: A Macroeconomic Overview," NBER Working Papers 6833, National Bureau of Economic Research, Inc.
    2. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc.
    3. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Venus Khim-Sen Liew & Chee-Keong Choong & Evan Lau & Kian-Ping Lim, 2005. "Exchange Rate – Relative Price Nonlinear Cointegration Relationship in Malaysia," Economics Bulletin, AccessEcon, vol. 6(11), pages 1-16.
    2. Akarim, Yasemin Deniz & Sevim, Serafettin, 2013. "The impact of mean reversion model on portfolio investment strategies: Empirical evidence from emerging markets," Economic Modelling, Elsevier, vol. 31(C), pages 453-459.
    3. Baharumshah, Ahmad Zubaidi & Liew, Venus Khim-Sen & Chowdhury, Ibrahim, 2010. "Asymmetry dynamics in real exchange rates: New results on East Asian currencies," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 648-661, October.
    4. repec:ebl:ecbull:v:6:y:2005:i:11:p:1-16 is not listed on IDEAS
    5. MarkJ. Holmes, 2010. "Are Asia-Pacific Real Exchange Rates Stationary? A Regime-Switching Perspective," Pacific Economic Review, Wiley Blackwell, vol. 15(2), pages 189-203, May.
    6. Zurbruegg, R. & Allsopp, L., 2004. "Purchasing power parity and the impact of the East Asian currency crisis," Journal of Asian Economics, Elsevier, vol. 15(4), pages 739-758, August.
    7. Hsing, Y, 2009. "Functional Forms and PPP: The Case of Canada, the EU, Japan, and the U.K," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).

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