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Generalized long memory processes, failure of cointegration tests and exchange rate dynamics
Author(s) -
Smallwood Aaron D.,
Norrbin Stefan C.
Publication year - 2006
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.857
Subject(s) - cointegration , long memory , econometrics , exchange rate , process (computing) , monte carlo method , economics , computer science , mathematics , statistics , macroeconomics , volatility (finance) , operating system
This paper presents evidence that the equilibrium relationship in a system of nominal exchange rates is best described as a stationary GARMA process. The implementation of the GARMA methodology helps explain conflicting and puzzling results from the use of linear cointegration and fractional cointegration methods. Furthermore, we use Monte Carlo analysis to document problems with standard cointegration tests when the attraction process is distributed as a long memory GARMA process. Copyright © 2006 John Wiley & Sons, Ltd.