Parity theorems revisited: an ARDL bound test with non-parity factors
The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availa...
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Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia
2015
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Online Access: | http://psasir.upm.edu.my/id/eprint/56411/1/Parity%20theorems%20revisited%20an%20ARDL%20bound%20test%20with%20non-parity%20factors.pdf http://psasir.upm.edu.my/id/eprint/56411/ http://web.usm.my/journal/aamjaf/11-1-1-2015.html |
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my.upm.eprints.564112017-07-31T09:17:24Z http://psasir.upm.edu.my/id/eprint/56411/ Parity theorems revisited: an ARDL bound test with non-parity factors Syed Mohamed, Mohamed Ariff Zarei, Alireza The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availability of powerful econometric approaches to resolve unsolved issues. We re-examine the exchange rate behaviour of the US economy, applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139 per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over 1960–2014 is consistent with parity and non-parity theories. Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia 2015 Article PeerReviewed application/pdf en http://psasir.upm.edu.my/id/eprint/56411/1/Parity%20theorems%20revisited%20an%20ARDL%20bound%20test%20with%20non-parity%20factors.pdf Syed Mohamed, Mohamed Ariff and Zarei, Alireza (2015) Parity theorems revisited: an ARDL bound test with non-parity factors. Asian Academy of Management Journal of Accounting and Finance, 11 (1). pp. 1-26. ISSN 1823-4992; ESSN: 2180-4192 http://web.usm.my/journal/aamjaf/11-1-1-2015.html |
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The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availability of powerful econometric approaches to resolve unsolved issues. We re-examine the exchange rate behaviour of the US economy, applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139 per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over 1960–2014 is consistent with parity and non-parity theories. |
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Article |
author |
Syed Mohamed, Mohamed Ariff Zarei, Alireza |
spellingShingle |
Syed Mohamed, Mohamed Ariff Zarei, Alireza Parity theorems revisited: an ARDL bound test with non-parity factors |
author_facet |
Syed Mohamed, Mohamed Ariff Zarei, Alireza |
author_sort |
Syed Mohamed, Mohamed Ariff |
title |
Parity theorems revisited: an ARDL bound test with non-parity factors |
title_short |
Parity theorems revisited: an ARDL bound test with non-parity factors |
title_full |
Parity theorems revisited: an ARDL bound test with non-parity factors |
title_fullStr |
Parity theorems revisited: an ARDL bound test with non-parity factors |
title_full_unstemmed |
Parity theorems revisited: an ARDL bound test with non-parity factors |
title_sort |
parity theorems revisited: an ardl bound test with non-parity factors |
publisher |
Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia |
publishDate |
2015 |
url |
http://psasir.upm.edu.my/id/eprint/56411/1/Parity%20theorems%20revisited%20an%20ARDL%20bound%20test%20with%20non-parity%20factors.pdf http://psasir.upm.edu.my/id/eprint/56411/ http://web.usm.my/journal/aamjaf/11-1-1-2015.html |
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