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

Joakim Westerlund, Paresh Narayan

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1317-1333
Number of pages17
JournalEuropean Journal of Finance
Volume21
Issue number15
DOIs
Publication statusPublished - 8 Dec 2015
Externally publishedYes

Keywords

  • PPP
  • real exchange rates
  • sequential unit root tests

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