Exchange rates, market efficiency and purchasing power parity: Long-run tests for the Latin American currencies

Ortíz, Edgar; Cabello, Alejandra; Jesús, Raúl de; Johnson, Robert A.

doi:10.22201/iiec.20078951e.2005.141.7582

RPD

2009

DOI: 10.22201/iiec.20078951e.2005.141.7582

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Exchange rates, market efficiency and purchasing power parity: Long-run tests for the Latin American currencies

Edgar Ortíz¹,

Alejandra Cabello²,

Raúl de Jesús³

et al.

Abstract: In efficient markets current prices reflect all available information. Past prices do not contain any useful information for predicting future prices or for realizing extraordinary gains. This principle, known as the weak hypothesis of informational market efficiency, has been incorporated into Purchasing Power Parity (PPP) theory to overcome its limitations in Résumé Dans des marchés efficients, les prix courants reflètent toute l'information disponible. Les prix du passé ne contiennent aucune information uti… Show more

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Cited by 3 publications

References 46 publications

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Investigating smooth breaks in real exchange rates

Chu¹

2013

JEFS

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We investigate the validity of purchasing power parity of 7 Middle East countries over January 1980 to August 2008 by applying the stationary test with a nonlinear Fourier function as proposed by Becker et al. (2006). This test allows us to study the presence of unknown smooth structural breaks and the stationarity of real exchange rates. The empirical results indicate that PPP is not valid for most of these Middle East countries except the Bahrain and Israel. Introduction"Does purchasing power parity work?" has been a disputable empirical issue for decades while it has important implications in international macroeconomics. According to the basic theoretical idea of purchasing power parity (PPP), we can expect that the real exchange rate returns to a constant equilibrium value in the long-run since any price of an internationally traded good should be the same anywhere in the world. In other words, a stationary real exchange rate indicates the existence of a long-run relationship between nominal exchange rate, domestic and foreign prices, and then the PPP hypothesis holds. However, many studies have examined the PPP hypothesis and found the conflict results for the existence of PPP. For example, Huizinga (1987) rejects the random walk by showing the existence of a mean-reversion component in real exchange rate increments, and Abuaf and Jorion (1990) and Lothian and Taylor (1996) find evidence of mean reversion in real exchange rates. Moreover, the results obtained using panel unit-root tests by Wu (1996), Oh (1996 and Papell (1997) support long-run PPP. On the other hand, the empirical evidence of Adler and Lehmann (1983) fail to reject the hypothesis that real exchange rates follow a random walk. Bahmani-Oskooee and Rhee (1992) and Mahdavi and Zhou (1994) also fail to find the existence of a long-run relationship between nominal exchange rate and relative prices through the cointegration technique. Therefore, from these studies, we find that the PPP hypothesis still remains the open question.

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Investigating smooth breaks in real exchange rates

Chu¹

2013

JEFS

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Döviz Piyasasının Etkinliği: Türkiye için Bir Analiz

Berke¹,

Özcan²,

Dizdarlar³

2014

eab

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In the literature, the effectiveness of the foreign exchange market is an important concept for traders and policy makers, if price reflects all information in the market, this market is said to be efficient. In other words, Fama et al. (1969) term of the efficient market were defined as a market which " adapt quickly to new information". At the weak form efficiency, in the market, all prices, past prices or returns can be reflected in all the information, on the other hand, at the semi-strong form efficiency, the exchange rates are not only reflect past information concerning exchange rates, but also they are reflect other currency exchange rates and information concerning macroeconomic variables. The main purpose of this study is whether TL / $ and TL / Euro exchange rate markets are efficient at the weak and semi-strong form or not is to analyze by using unit root and cointegration methods with structural breaks during the period 2006:04-2013:12 in Turkey. Analysis results show that the Turkish foreign exchange market is efficient at the weak form and not efficient at the semi-strong form and forward rate unbiasedness hypothesis is not valid for Turkey.

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Legislative Strategic Synergy and Capital Efficiency: 'Job Creation, Sustainable Competitive Advantage and the Inherent Nature of Inflation'

Krumbein¹

2012

SSRN Journal

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Exchange rates, market efficiency and purchasing power parity: Long-run tests for the Latin American currencies

Cited by 3 publications

References 46 publications

Investigating smooth breaks in real exchange rates

Investigating smooth breaks in real exchange rates

Döviz Piyasasının Etkinliği: Türkiye için Bir Analiz

Legislative Strategic Synergy and Capital Efficiency: 'Job Creation, Sustainable Competitive Advantage and the Inherent Nature of Inflation'

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