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Testing long-run PPP with infinite-variance returns

✍ Scribed by Barry Falk; Chun-Hsuan Wang

Publisher
John Wiley and Sons
Year
2003
Tongue
English
Weight
108 KB
Volume
18
Category
Article
ISSN
0883-7252

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✦ Synopsis

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.

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