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Explaining the European exchange rates deviations: long memory or nonlinear adjustment?

Listed author(s):
  • Gilles Dufrénot

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Sandrine Lardic

    (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Laurent Mathieu

    (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, C3ED - Centre d'économie et d'éthique pour l'environnement et le développement - UVSQ - Université de Versailles Saint-Quentin-en-Yvelines)

  • Valérie Mignon

    ()

    (CEPII - Centre d'études prospectives et d'informations internationales)

  • Anne Peguin-Feissolle

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille 2 - Université Paul Cézanne - Aix-Marseille 3 - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

The standard macroeconomic view links the equilibrium level of foreign exchange rates to the state of the macroeconomic fundamentals. Any deviation from the equilibrium level is viewed as temporary since there are forces ensuring quickly mean-reverting dynamics. The aim of this article is to investigate whether the empirical observation of the real exchange rate misalignments in five European countries over the period 1979–1999 was consistent with the hypothesis of temporary deviations from the fundamentals, or whether they must be associated with significant persistent dynamics. We depart from the traditional framework of linear cointegration by using fractional cointegration or non-linear cointegration. Therefore, we will try to discriminate between linear long memory dynamics and non-linear short memory dynamics.

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Paper provided by HAL in its series Post-Print with number halshs-00390141.

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Date of creation: 2008
Publication status: Published in Journal of International Financial Markets, Institutions & Money, 2008, 18 (3 July), pp.207-215. <10.1016/j.intfin.2006.09.004>
Handle: RePEc:hal:journl:halshs-00390141
DOI: 10.1016/j.intfin.2006.09.004
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00390141
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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  1. Sowell, Fallaw, 1992. "Maximum likelihood estimation of stationary univariate fractionally integrated time series models," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 165-188.
  2. Gilles Dufrenot & Laurent Mathieu & Valerie Mignon & Anne Peguin-Feissolle, 2006. "Persistent misalignments of the European exchange rates: some evidence from non-linear cointegration," Applied Economics, Taylor & Francis Journals, vol. 38(2), pages 203-229.
  3. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
  4. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, vol. 59(5), pages 1279-1313, September.
  5. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
  7. Emmanuel Dubois & Sandrine Lardic & Valérie Mignon, 2004. "The Exact Maximum Likelihood-Based Test for Fractional Cointegration: Critical Values, Power and Size," Computational Economics, Springer;Society for Computational Economics, vol. 24(3), pages 239-255, July.
  8. Clark, Peter B. & MacDonald, Ronald, 2004. "Filtering the BEER: A permanent and transitory decomposition," Global Finance Journal, Elsevier, vol. 15(1), pages 29-56.
  9. Alvaro Escribano & Oscar Jorda, "undated". "Improved Testing And Specification Of Smooth Transition Regression Models," Department of Economics 97-26, California Davis - Department of Economics.
  10. KIRMAN, Alan & TEYSSIÈRE, Gilles, 2002. "Bubbles and long-range dependence in asset prices volatilities," CORE Discussion Papers 2002060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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