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A sequential purchasing power parity test for panels of large cross-sections and implications for investors

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  • Joakim Westerlund
  • Paresh Narayan

Abstract

In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors.

Suggested Citation

  • Joakim Westerlund & Paresh Narayan, 2015. "A sequential purchasing power parity test for panels of large cross-sections and implications for investors," The European Journal of Finance, Taylor & Francis Journals, vol. 21(15), pages 1317-1333, December.
    • Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1317-1333
    DOI: 10.1080/1351847X.2014.948216
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    Cited by:

    1. El Ouadghiri, Imane & Uctum, Remzi, 2016. "Jumps in equilibrium prices and asymmetric news in foreign exchange markets," Economic Modelling, Elsevier, vol. 54(C), pages 218-234.
    2. Avdoulas, Christos & Bekiros, Stelios & Boubaker, Sabri, 2016. "Detecting nonlinear dependencies in eurozone peripheral equity markets: A multistep filtering approach," Economic Modelling, Elsevier, vol. 58(C), pages 580-587.
    3. Tsuji, Chikashi, 2020. "Correlation and spillover effects between the US and international banking sectors: New evidence and implications for risk management," International Review of Financial Analysis, Elsevier, vol. 70(C).

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