Evans, M.D.D. and K.K. Lewis, 1993, Trend in excess returns in currency and bond markets, European Economic Review 37, 1005-1019.  Home/Search   Document Not in Database   Summary   Related Articles   Check

....such as those suggested by Perron (1994) However, results presented by Nelson, Piger, and Zivot (1999) suggest that such tests do not provide substantial increases in power over the ADF test when the data generating process exhibits Markov regime switching of the types considered here. 12 Evans and Lewis (1993) show that cointegration tests can be biased in favor of the null hypothesis if a series in the cointegrating equation undergoes Markov regime switching. Since we reject the null hypothesis this does not seem to be a significant problem in this case. 16 = t i i c b i p (equilibrium error) i ....

Evans, M.D.D. and K.K. Lewis, 1993, Trend in excess returns in currency and bond markets, European Economic Review 37, 1005-1019.

....Schmidt (1993) Seo (1999) and Hecq (1995) the latter considering the effects on Perron type tests. However, the effects of Markov switching in variance has not been considered. The only studies the authors are aware of investigating the effects of Markov regime change in a testing framework are Evans and Lewis (1993) and Hall, Psaradakis and Sola (1997) who conclude that Markov switching in trend growth rate or in the cointegrating vector will weaken the evidence in favor of cointegration in a bivariate system. The paper is organized as follows: In Section 2 we evaluate the performance of unit root tests when ....

Evans, M.D.D., and Lewis, K.K. (1993), "Trend in Excess Returns in Currency and Bond Markets," European Economic Review, 37, 1005-1019.

....should be a stationary (that is, an I(0) process. 4 The empirical evidence on the existence of cointegration between t k S and t f is decidedly mixed. Baillie and Bollerslev (1989) and Hai et al. 1997) find that t k S and t f form a cointegrated system with a unitary cointegrating vector. Evans and Lewis (1993) and Alexakis and Apergis (1996) fail to even find a long run relationship between forward and corresponding future spot rates. Ngama (1992) 2 For alternative forms of testing the FRUH and a survey of the evidence and issues involved see Baillie and McMahon (1989) and Engel (1996) 3 A series ....

Evans, M. and K. Lewis (1993), Trends in excess returns in currency and bond markets, European Economic Review, 37, 1005-1019.

....trend model for prices. Garcia and Perron (1996) argue for an I(0) Markovswitching trend and variance model of the inflation and real interest rates based on unit root tests performed by Perron (1990) suggesting these series were I(0) if one break in the level of the trend function is allowed. Evans and Lewis (1993) provide Monte Carlo evidence that tests of whether two series are cointegrated will incorrectly conclude that the two series have separate I(1) components if one of the series has a Markov switching trend growth rate. Finally, many studies which employ a Markov switching variance or trend ....

Evans, M.D.D., and Lewis, K.K. (1993), "Trend in Excess Returns in Currency and Bond Markets," European Economic Review, 37, 1005-1019.

....recent papers have presented evidence that appears to reject this characterization in a surprising way. They show that, according to some tests, some excess returns appear to contain a unit root. Of the four papers of which we are aware, three provide evidence from foreign exchange markets; Evans and Lewis (1993) (herinafter EL93) Evans and Lewis (1995) herinafter EL95) and Crowder (1994) All three begin with the premise that the log of 1 the spot exchange rate is I(1) Therefore, if it is not cointegrated with the log of the k f t x k t# s t #k # f k x t 112 MARIE JOSE GODBOUT AND SIMON ....

....yen, and the three corresponding 1 or 3 month log forward exchange rates. The data are monthly and cover the period 1975 to 1989. Excess returns are taken to be the difference between the log forward rate and the log spot rate corresponding to the same settlement data as the forward rate. 1. 1 Evans and Lewis (1993) 1.1.1 Summary If each spot rate is cointegrated with its respective forward rate, then a system of three spot rates and three forward rates should have three cointegrating vectors in the system. If there are fewer than three cointegrating vectors, then at least one of the excess return series ....

[Article contains additional citation context not shown here]

Evans, M. D. D. and K. Lewis (1993). "Trends in Excess Returns in Currency and Bond Markets," European Economic Review, 37, 1005-1019.

....of more than two cointegrating vectors. 6 An alternative explanation for their failure to find evidence of three cointegrating vectors might be that the Johansen (1988) tests simply lack the power to detect them. EL93 address this problem with a series of Monte Carlo experiments (documented in Evans and Lewis (1992)) Simulating six variable systems with three cointegrating vectors, they find that a lack of power in the Johansen test cannot explain their results. More precisely, they find that the value of the test statistic for the null hypothesis that there are no more than two cointegrating vectors lies ....

....that all these vectors contained three trends. 9 EL95 do not reference their earlier work, so it is not obvious how these results are to be reconciled with those of EL93. More importantly, however, we are concerned that the data generating process (DGP) used in the simulations in EL93 and Evans and Lewis (1992) might give unrepresentative results. Their DGP is specified as , where 10 (1) is a d dimensional vector with m stochastic trends (d m cointegrating vectors) is the matrix of cointegrating vectors, are mutually uncorrelated innovations of dimension m, d m, and d. Although EL vary the number of ....

[Article contains additional citation context not shown here]

Evans, M. D. D. and K. Lewis (1992). "Trends in Excess Returns in Currency and Bond Markets," NBER working paper No. 4116.

Online articles have much greater impact   More about CiteSeer.IST   Add search form to your site   Submit documents   Feedback  

CiteSeer.IST - Copyright Penn State and NEC