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Testing long-run PPP with infinite-variance returns

Author

Listed:
  • Barry Falk

    (Department of Economics, Iowa State University, USA)

  • Chun-Hsuan Wang

    (Department of Finance, Ming Chuan University, Taiwan)

Abstract
This paper investigates the long-run purchasing power parity hypothesis when exchange rate returns and inflation rates are assumed to be heavy-tailed stochastic processes. More specifically, residual-based and likelihood-ratio-based cointegration tests of PPP that explicitly allow for infinite-variance innovations are applied to monthly data (1973:1-1999:12) for Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. Our test results are marginally less supportive of PPP when the innovations are assumed to be infinite-variance, α-stable processes. Copyright © 2003 John Wiley & Sons, Ltd.

Suggested Citation

  • Barry Falk & Chun-Hsuan Wang, 2003. "Testing long-run PPP with infinite-variance returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(4), pages 471-484.
    • Handle: RePEc:jae:japmet:v:18:y:2003:i:4:p:471-484
    DOI: 10.1002/jae.711
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    References listed on IDEAS

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    Cited by:

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    2. Matteo Barigozzi & Giuseppe Cavaliere & Lorenzo Trapani, 2024. "Inference in Heavy-Tailed Nonstationary Multivariate Time Series," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 119(545), pages 565-581, January.
    3. D. M. Mahinda Samarakoon & Keith Knight, 2009. "A Note on Unit Root Tests with Infinite Variance Noise," Econometric Reviews, Taylor & Francis Journals, vol. 28(4), pages 314-334.
    4. da Fonseca, Eder Lucio & Alencar, Airlane Pereira & Morettin, Pedro Alberto, 2019. "Time-varying cointegration model using wavelets," Statistics & Probability Letters, Elsevier, vol. 145(C), pages 260-267.
    5. Yang, Yang & Zhao, Zhao, 2020. "Quantile nonlinear unit root test with covariates and an application to the PPP hypothesis," Economic Modelling, Elsevier, vol. 93(C), pages 728-736.
    6. Pierre Perron & Eduardo Zorita & Iliyan Georgiev & Paulo M. M. Rodrigues & A. M. Robert Taylor, 2017. "Unit Root Tests and Heavy-Tailed Innovations," Journal of Time Series Analysis, Wiley Blackwell, vol. 38(5), pages 733-768, September.
    7. Fatma Ozgu Serttas, 2018. "Infinite-Variance Error Structure in Finance and Economics," International Econometric Review (IER), Econometric Research Association, vol. 10(1), pages 14-23, April.
    8. Serttas, Fatma Ozgu, 2010. "Essays on infinite-variance stable errors and robust estimation procedures," ISU General Staff Papers 201001010800002742, Iowa State University, Department of Economics.
    9. Ma, Wei & Li, Haiqi & Park, Sung Y., 2017. "Empirical conditional quantile test for purchasing power parity: Evidence from East Asian countries," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 211-222.
    10. Matteo Barigozzi & Giuseppe Cavaliere & Lorenzo Trapani, 2020. "Determining the rank of cointegration with infinite variance," Discussion Papers 20/01, University of Nottingham, Granger Centre for Time Series Econometrics.

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