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

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.

Purchasing Power Parity Between Vietnam and United States

“…The results lead to the conclusion that the long-run PPP hypothesis in China does not hold over the sample period January 1994 to November 2010 [6]. A recent study also found that the evidence in favor of PPP is very weak when using monthly time series data for not less than 64 countries and a new sequential approach to test for PPP [7]. While a study has a mixed result by testing the validity of long-run purchasing power parity for 20 African countries using quarterly data.…”