The Purchasing Power Parity Debate

Taylor, Alan M.; Taylor, Mark P.

doi:10.1257/0895330042632744

Cited by 795 publications

(447 citation statements)

References 79 publications

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“…The AFX Index is prepared at Liverpool John Moores University. 9 Recent evidence on PPP is reviewed in Taylor and Taylor (2004). prices are sensitive to volatility. Managers are at risk if they are long (short) volatility when volatility declines (increases).…”

Section: Currency Returns Factors and Methodologymentioning

confidence: 99%

Do Professional Currency Managers Beat the Benchmark?

Pojarliev¹,

Levich²

2007

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We investigate an index of returns on professionally managed currency funds and a subset of returns from 34 individual currency fund managers. Over the period 1990-2006, excess returns earned by currency fund managers have averaged 25 basis points per month. We examine the relationship of these returns to four factors representing returns based on carry trading, trend-following, value trading and currency volatility. These four factors explain a substantial portion of the variability in index returns in the entire period and in sub-periods. We perform similar regressions for the 34 individual funds, and find many funds where returns are significantly related to these four factors. Our approach impacts the definition of alpha returns from currency speculation, modifying it from the excess return earned by the fund, to only that portion of the excess returns not explained by the four factors. While the impact on measured alpha is substantial, we find that some currency fund managers continued to generate alpha returns in the most recent sample period.

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Section: Currency Returns Factors and Methodologymentioning

confidence: 99%

Do Professional Currency Managers Beat the Benchmark?

Pojarliev¹,

Levich²

2007

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“…However, there is not much research on highfrequency financial series, such as the intraday Forex trading, since the plentiful trade records (tick by tick) are not uniformly distributed (Dacorogona et al, 2001, Tsai 2002. Classical linear models such as the Purchasing Power Parity model (BahmaniOskooee et al, 2006, Choong et al, 2003, Taylor and Taylor, 2004 fail to explain the temporal currency fluctuations. It is demonstrated that nonlinear forecasting methods, as the one we propose here, are often better than linear ones for predicting the Forex trading series (Kamruzzaman andSarker, 2004, Boero andMarrocu, 2002).…”

Section: Predicting the Forex Intra-day Trading Seriesmentioning

confidence: 99%

Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm

et al. 2008

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Universal compression algorithms can detect recurring patterns in any type of temporal data -including financial data -for the purpose of compression. The universal algorithms actually find a model of the data that can be used for either compression or prediction. We present a universal Variable Order Markov (VOM) model and use it to test of the weak form of the Efficient Market Hypothesis (EMH).The EMH is tested for 12 pairs of international intra-day currency exchange rates for one year series of 1,5,10,15,20,25 and 30 minutes. Statistically significant compression is detected in all the time-series and the high frequency series are also predictable above random. However, the predictability of the model is not sufficient to generate a profitable trading strategy, thus, Forex market turns out to be efficient, at least most of the time.

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“…These papers are among many which have found that the data on real exchange rates can 1 For recent surveys on the literature which highlight the dynamics of real exchange rates characterized as a nonlinear process, see Ahmad and Glosser (2011), Taylor (2006), and Taylor and Taylor (2004). Engel, Mark and West (2007) provide a thorough overview of the developments in both theoretical and empirical literature.…”

Section: Introductionmentioning

confidence: 99%

Causes of nonlinearities in low-order models of the real exchange rate

Ahmad

Mykhaylova

2013

Journal of International Economics

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This paper investigates the extent to which modern DSGE models, which feature local currency pricing, home bias, nontraded goods and incomplete markets, can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current ‡oating period. Our key …ndings are as follows. First, if the solution to the DSGE model is approximated to the …rst order, then linearity tests that utilize univariate autoregressions of the real exchange rate su¤er from an omitted variables problem, which leads them to overestimate the true incidence of nonlinearity. Consequently, studies that fail to control for this problem may spuriously …nd evidence of nonlinearities in the data, despite the fact that the data generating process may be linear. Second, we propose a strategy that can largely eliminate this distortion. Finally, we …nd that DSGE models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples.JEL Classi…cation: C15 C32 F41 F47

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The Purchasing Power Parity Debate

Cited by 795 publications

References 79 publications

Do Professional Currency Managers Beat the Benchmark?

Do Professional Currency Managers Beat the Benchmark?

Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm

Causes of nonlinearities in low-order models of the real exchange rate

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