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Unit-Root Test and Excess Returns

Author

Listed:
  • Godbout, M.J.
  • Van Norden, S.

Abstract

Several recent papers have presented evidence from foreign exchange and other markets suggesting that the log of excess returns can be characterized as first-order integrated processes (I(1)). This contrasts sharply with the "conventional" wisdom that log prices are integrated of order one I(1) and that log returns should therefore be integrated of order zoro I(0), and even more sharply with the view that past returns have no ability to predict future returns (weak market efficiency). It has been suggested that this should be interpreted as evidence of the importance of regime- switching in asset prices, since such non linear processes can produce these results even when returns are truly I(0). This paper syggests an alternative interpretation.

Suggested Citation

  • Godbout, M.J. & Van Norden, S., 1996. "Unit-Root Test and Excess Returns," Staff Working Papers 96-10, Bank of Canada.
  • Handle: RePEc:bca:bocawp:96-10
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    References listed on IDEAS

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    1. Gregory, Allan W, 1994. "Testing for Cointegration in Linear Quadratic Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 347-360, July.
    2. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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    5. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
    6. Martin D. D. Evans & Karen K. Lewis, 2017. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 3, pages 59-99 World Scientific Publishing Co. Pte. Ltd..
    7. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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    12. Bekaert, Geert & Hodrick, Robert J., 1993. "On biases in the measurement of foreign exchange risk premiums," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 115-138, April.
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    29. Martin D. D. Evans & Karen K. Lewis, 2017. "Trends in Excess Returns in Currency and Bond Markets," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 2, pages 39-57 World Scientific Publishing Co. Pte. Ltd..
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    Citations

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    Cited by:

    1. Joseph Atta-Mensah, 2004. "Money Demand and Economic Uncertainty," Staff Working Papers 04-25, Bank of Canada.
    2. Zivot, Eric, 2000. "Cointegration and forward and spot exchange rate regressions," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 785-812, December.
    3. Eric Zivot, 1998. "Cointegration and Forward and Spot Exchange Rate Regressions," Econometrics 9812001, EconWPA.

    More about this item

    Keywords

    FINANCIAL MARKET; UNIT ROOTS; PRICES;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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