Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship

Bec, Frédéric; Salem, Mélika Ben; Carrasco, Marine

doi:10.1198/073500104000000389

Cited by 123 publications

(73 citation statements)

References 32 publications

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“…Although the KSS test is designed to have power against a smooth transition alternative, it can be regarded as Portmanteau test against more general alternatives. In fact, Sollis (2005) shows that it has good power performance against a three regime threshold alternative, of the sort considered by Bec et al (2004). …”

Section: Pairwise Ppp Testsmentioning

confidence: 99%

Pairwise Tests of Purchasing Power Parity

Pesaran

Smith

Yamagata

et al. 2009

Econometric Reviews

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Given nominal exchange rates and price data on N + 1 countries indexed by i = 0, 1, 2, ..., N , the standard procedure for testing purchasing power parity (PPP) is to apply unit root or stationarity tests to N real exchange rates all measured relative to a base country, 0, often taken to be the US. Such a procedure is sensitive to the choice of base country, ignores the information in all the other cross rates and is subject to a high degree of cross section dependence which has adverse effects on estimation and inference. In this paper we conduct a variety of unit root tests on all possible N (N + 1)/2 real rates between pairs of the N + 1 countries and estimate the proportion of the pairs that are stationary. This proportion can be consistently estimated even in the presence of cross-section dependence. We estimate this proportion using quarterly data on the real exchange rate for 50 countries over the period 1957-2001. The main substantive conclusion is that to reject the null of no adjustment to PPP requires sufficiently large disequilibria to move the real rate out of the band of inaction set by trade costs. In such cases one can reject the null of no adjustment to PPP up to 90% of the time as compared to around 40% in the whole sample using a linear alternative and almost 60% using a non-linear alternative.JEL Categories: C23, F31, F41

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Section: Pairwise Ppp Testsmentioning

confidence: 99%

Pairwise Tests of Purchasing Power Parity

Pesaran

Smith

Yamagata

et al. 2009

Econometric Reviews

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“…The work of Michael, Nobay and Peel (1997), Peel, Sarno and Taylor (2001), Bec, Carrasco and Salem (2004), and Leon and Najarian (2005) indicated that a three regime TAR better describes the stochastic process followed by several RER, corroborating the transaction cost theory. An important difference between the work of Leon and Najarian resides on the fact that they do not impose symmetric thresholds, which they found to be an important restriction.…”

Section: Evidences On the Behavior Of The Real Exchange Ratementioning

confidence: 60%

“…Relying on threshold autoregression (TAR) models, Michael, Nobay, and Peel (1997), Obstfeld and Taylor (1997), Bec, Carrasco and Salem (2004), Leon and Najarian (2005) found evidences of asymmetry. According to these works, the RER in period t follows a random walk if it assumes central values in 1 − t , and behaves as a convergent AR process it takes extreme values in 1 − t .…”

Section: Introductionmentioning

confidence: 99%

Capturing asymmetry in real exchange rate with quantile autoregression

Ferreira¹

2011

Applied Economics

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Quantile Autoregression (QAR) is used to explore asymmetries in the adjustment process of pairwise Real Exchange Rate (RER) between the Italian lire, French franc, Deutsch mark and the British pound. Based on the best specification for each quantile we construct predicted conditional density functions, which guided us to identify two sources of asymmetry: (1) dispersion depends on the conditioned value of the RER, i.e. 'conditional' heteroskedasticity; (2) the probability of increases and falls also changes according to the conditioned value, i.e. there is higher probability for the RER to appreciate (depreciate) given the currency is depreciated (appreciated). We only verified strong heterokedasticity in relations among the lire, franc and mark, which was resolved by estimating quadratic autoregressive model for some quantiles. Relations involving the pound presented stable but higher dispersion indicating larger probability of wider oscillation.

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“…So the conditions on the parameters that guarantee the mixing property of a mr-lstar are the same as those for the mixing property of its setar counterpart. We refer the reader to the mixing conditions for a setar(p) model given in Theorem 1 of Bec et al [2004] and do not reproduce them here. The more striking result is that the coefficient in the middle regime, ρ 2 , may be equal to 0 (corresponding to a unit root) or positive (explosive root) while the model remains globally stationary.…”

Section: Detecting Mean Reversion In Real Exchange Rates From a Multimentioning

confidence: 99%

“…This property implies that (a) the stationary distribution of y t exists, (b) starting from an arbitrary value y 0 the process y t becomes stationary exponentially fast, and (c) y t is α -mixing with geometric decay which is a desirable property to do inference. Bec et al [2004] study the mixing properties of a setar(p). We give here an intuitive argument that shows that the mixing properties of setar and mr-lstar are essentially the same.…”

Section: Detecting Mean Reversion In Real Exchange Rates From a Multimentioning

confidence: 99%

Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model

Bec¹,

Salem²,

Carrasco³

2010

Annals of Economics and Statistics

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Recent studies on general equilibrium models with transaction costs show that the dynamics of the real exchange rate are necessarily nonlinear. Our contribution to the literature on nonlinear price adjustment mechanisms is threefold. First, we model the real exchange rate by a Multi-Regime Logistic Smooth Transition Auto Regression (mr-lstar), allowing for both estar-type and setar-type dynamics. This choice is motivated by the fact that even the theoretical models, which predict a smooth behavior for the real exchange rate, do not rule out the possibility of a discontinuous adjustment as a limit case. Second, we propose two classes of unit-root tests against this mr-lstar alternative, based respectively on the likelihood and on an auxiliary model. Their asymptotic distributions are derived analytically. Third, when applied to 28 bilateral real exchange rates, our tests reject the null hypothesis of a unit root for eleven series bringing evidence in favor of the purchasing power parity.*

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Tests for Unit-Root versus Threshold Specification With an Application to the Purchasing Power Parity Relationship

Cited by 123 publications

References 32 publications

Pairwise Tests of Purchasing Power Parity

Pairwise Tests of Purchasing Power Parity

Capturing asymmetry in real exchange rate with quantile autoregression

Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model

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