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73
The forward discount anomaly and the risk premium: A survey of recent evidence
 JOURNAL OF EMPIRICAL FINANCE
, 1996
"... Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward ..."
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Cited by 394 (11 self)
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Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation of uncovered interest parity to real interest parity, and the implications of uncovered interest parity for cointegration of various quantities are discussed. The modeling and testing for risk premiums is surveyed. Included in this area are tests of the consumption CAPM, tests of the latent variable model, and portfoliobalance models of risk premiums. General equilibrium models of the risk premium are examined and their empirical implications explored. The survey does not cover the important areas of learning and peso problems, tests of rational expectations based on survey data, or the models of irrational expectations and speculative bubbles.
Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries. NBER Working Paper no
, 1996
"... The BalassaSamuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, it implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods se ..."
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Cited by 149 (1 self)
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The BalassaSamuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, it implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods sectors. Second, it assumes purchasing power parity holds for traded goods. We test both of these using a panel of OECD countries. Our results suggest that relative prices generally reflect relative labor productivities in the long run. The evidence on purchasing power parity in traded goods is less favorable, at least when we
Exchange Rates and Monetary Fundamentals: What Do We Learn From Long–Horizon Regressions
 Journal of Applied Econometrics
, 1999
"... Abstract: Longhorizon regression tests are widely used in empirical finance, despite evidence of severe size distortions. I propose a new bootstrap method for smallsample inference in longhorizon regressions. A Monte Carlo study shows that this bootstrap test greatly reduces the size distortions ..."
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Cited by 134 (11 self)
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Abstract: Longhorizon regression tests are widely used in empirical finance, despite evidence of severe size distortions. I propose a new bootstrap method for smallsample inference in longhorizon regressions. A Monte Carlo study shows that this bootstrap test greatly reduces the size distortions of conventional longhorizon regression tests. I also find that longhorizon regression tests do not have power advantages against economically plausible alternatives. The apparent lack of higher power at long horizons suggests that previous findings of increasing longhorizon predictability are more likely due to size distortions than to power gains. I illustrate the use of the bootstrap method by analyzing whether monetary fundamentals help predict changes in four major exchange rates. In contrast to earlier studies, I find only weak evidence of exchange rate predictability and no evidence of increasing longhorizon predictability. Many of the differences in results can be traced to the implementation of the test.
LongRun PPP May Not Hold After All
, 1999
"... Recent tests using long data series find evidence in favor of longrun PPP. These tests may have reached the wrong conclusion. Using artificial data calibrated to nominal exchange rates and disaggregated data on prices, we show that tests on longrun PPP have serious size biases. In the baseline cas ..."
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Cited by 109 (3 self)
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Recent tests using long data series find evidence in favor of longrun PPP. These tests may have reached the wrong conclusion. Using artificial data calibrated to nominal exchange rates and disaggregated data on prices, we show that tests on longrun PPP have serious size biases. In the baseline case, unit root and cointegration tests with a nominal size of five per cent have true sizes that range from 0.90 to 0.99 in 100year long data series, even though there is a permanent component that accounts for 42% of the 100year forecast variance of the real exchange rate. Tests of stationarity are shown to have very low power in the same circumstances.
Before the Fall: Were East Asian Currencies Overvalued? NBER Working Paper No. 6491
, 1998
"... Abstract: I implement two major approaches to identifying the equilibrium exchange rate. First, the concept of purchasing power parity is tested and used to define the equilibrium real exchange rate for the Indonesian rupiah, Korean won, Malaysian ringgit, Philippine peso, Singapore dollar, Taiwanes ..."
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Cited by 88 (12 self)
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Abstract: I implement two major approaches to identifying the equilibrium exchange rate. First, the concept of purchasing power parity is tested and used to define the equilibrium real exchange rate for the Indonesian rupiah, Korean won, Malaysian ringgit, Philippine peso, Singapore dollar, Taiwanese dollar and the Thai baht. The calculated PPP rates are then used to evaluate whether these seven East Asian currencies were overvalued. The purchasing power parity calculations are performed on broad price indices, price indices of tradable goods, and price indices of export goods using the Johansen and HorvathWatson cointegration test procedures. As of May 1997, the baht, ringgit and peso were overvalued according to this criterion. While the overvaluations are not large, they do appear to be persistent. Robustness checks for sensitivity to deflator, sample period, and numeraire currency are undertaken. Second, I calculate the implied equilibrium rates from a monetary model augmented by a proxy variable for productivity trends. The monetary models imply less substantial deviations from equilibrium. Furthermore, the results do not closely correspond to those obtained from the PPP calculations. Interestingly, both methods indicate that the Korean won was undervalued even before its recent discrete drop in value.
Rethinking the univariate approach to unit root testing: Using covariates to increase power. Econometric Theory
, 1995
"... In the context of testing for a unit root in a univariate time series, the convention is to ignore information in related time series. This paper shows that this convention is quite costly, as large power gains can be achieved by including correlated stationary covariates in the regression equation. ..."
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Cited by 68 (2 self)
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In the context of testing for a unit root in a univariate time series, the convention is to ignore information in related time series. This paper shows that this convention is quite costly, as large power gains can be achieved by including correlated stationary covariates in the regression equation. The paper derives the asymptotic distribution of ordinary leastsquares estimates of the largest autoregressive root and its tstatistic. The asymptotic distribution is not the conventional DickeyFuller distribution, but a convex combination of the DickeyFuller distribution and the standard normal, the mixture depending on the correlation between the equation error and the regression covariates. The local asymptotic power functions associated with these test statistics suggest enormous gains over the conventional unit root tests. A simulation study and empirical application illustrate the potential of the new approach. 1.
LongHorizon Exchange Rate Predictability?
, 1996
"... Several authors have recently investigated the predictability of exchange rates by fitting a sequence of longhorizon errorcorrection/regressions.//We/show/that/in/small/to medium/samples/such/a/procedure/gives/rise/to/spurious/evidence/of/predictive/power./A simulation/study/demonstrates/that/even ..."
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Cited by 58 (0 self)
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Several authors have recently investigated the predictability of exchange rates by fitting a sequence of longhorizon errorcorrection/regressions.//We/show/that/in/small/to medium/samples/such/a/procedure/gives/rise/to/spurious/evidence/of/predictive/power./A simulation/study/demonstrates/that/even/when/using/this/technique/on/two/independent/series, estimates/and/diagnostic/statistics/suggest/a/high/degree/of/predictability/of/the/dependent variable./We/apply/a/simple/modification/of/the/longhorizon/regression/due/to/Jegadeesh (1991),/which/may/provide/more/accurate/inference/for/researchers/interested/in/comparing short/and/longrun/predictability of U.S. dollar exchange rates.
Results of a Study of the Stability of Cointegrating Relations Comprised of Broad Monetary Aggregates
, 1999
"... We find strong evidence of a stable "money demand" relationship for MZM and M2M through the 1990s. Though the M2 relation breaks down somewhere around 1990, evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in M2 velocity, which began aro ..."
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Cited by 43 (1 self)
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We find strong evidence of a stable "money demand" relationship for MZM and M2M through the 1990s. Though the M2 relation breaks down somewhere around 1990, evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in M2 velocity, which began around 1990 and was largely over by 1994. Taken together, our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds. Although this reallocation may have been induced by depository restructuring, we argue that the substitution could be explained by appropriately measured opportunity cost.
Cointegration and LongHorizon Forecasting
 Journal of Business and Economic Statistics
, 1997
"... : We consider the forecasting of cointegrated variables, and we show that at long horizons nothing is lost by ignoring cointegration when forecasts are evaluated using standard multivariate forecast accuracy measures. In fact, simple univariate BoxJenkins forecasts are just as accurate. Our results ..."
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Cited by 43 (2 self)
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: We consider the forecasting of cointegrated variables, and we show that at long horizons nothing is lost by ignoring cointegration when forecasts are evaluated using standard multivariate forecast accuracy measures. In fact, simple univariate BoxJenkins forecasts are just as accurate. Our results highlight a potentially important deficiency of standard forecast accuracy measuresthey fail to value the maintenance of cointegrating relationships among variables and we suggest alternatives that explicitly do so. KEY WORDS: Prediction, Loss Function, Integration, Unit Root  2  1. INTRODUCTION Cointegration implies restrictions on the lowfrequency dynamic behavior of multivariate time series. Thus, imposition of cointegrating restrictions has immediate implications for the behavior of longhorizon forecasts, and it is widely believed that imposition of cointegrating restrictions, when they are in fact true, will produce superior longhorizon forecasts. Stock (1995, p. 1), for ...