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What do we know about real exchange rate nonlinearities?

Robinson Kruse, Michael Frömmel UGent, Lukas Menkhoff and Philipp Sibbertsen (2012) EMPIRICAL ECONOMICS. 43(2). p.457-474
abstract
Nonlinear modeling of adjustments to purchasing power parity has recently gained much attention. However, a huge body of the empirical literature applies ESTAR models and neglects the existence of other competing nonlinear models. Among these, the Markov Switching AR model has a strong substantiation in international finance. Our contribution to the literature is fivefold: First, ESTAR and MSAR models from a unit root perspective are compared. To this end, a new unit root test against MSAR is proposed as the second contribution. Thirdly, the case of misspecified alternatives in a Monte Carlo setup with real world parameter constellations is studied. The ESTAR unit root test is not indicative, while the MSAR unit test is robust. Fourthly, the case of correctly specified alternatives is considered and low power of the ESTAR but not for the MSAR unit root test is observed. Fifthly, an empirical application to real exchange rates suggests that they may indeed be explained by Markov Switching dynamics rather than ESTAR.
Please use this url to cite or link to this publication:
author
organization
year
type
journalArticle (original)
publication status
published
subject
keyword
Real exchange rates, PPP, unit root test, Markov Switching, ESTAR
journal title
EMPIRICAL ECONOMICS
Empir. Econ.
volume
43
issue
2
pages
457 - 474
Web of Science type
Article
Web of Science id
000308827200001
JCR category
ECONOMICS
JCR impact factor
0.614 (2012)
JCR rank
200/332 (2012)
JCR quartile
3 (2012)
ISSN
0377-7332
DOI
10.1007/s00181-010-0431-2
language
English
UGent publication?
yes
classification
A1
copyright statement
I have transferred the copyright for this publication to the publisher
id
1094766
handle
http://hdl.handle.net/1854/LU-1094766
date created
2011-01-05 19:06:43
date last changed
2016-12-19 15:45:03
@article{1094766,
  abstract     = {Nonlinear modeling of adjustments to purchasing power parity has recently gained much attention. However, a huge body of the empirical literature applies ESTAR models and neglects the existence of other competing nonlinear models. Among these, the Markov Switching AR model has a strong substantiation in international finance. Our contribution to the literature is fivefold: First, ESTAR and MSAR models from a unit root perspective are compared. To this end, a new unit root test against MSAR is proposed as the second contribution. Thirdly, the case of misspecified alternatives in a Monte Carlo setup with real world parameter constellations is studied. The ESTAR unit root test is not indicative, while the MSAR unit test is robust. Fourthly, the case of correctly specified alternatives is considered and low power of the ESTAR but not for the MSAR unit root test is observed. Fifthly, an empirical application to real exchange rates suggests that they may indeed be explained by Markov Switching dynamics rather than ESTAR.},
  author       = {Kruse, Robinson and Fr{\"o}mmel, Michael and Menkhoff, Lukas and Sibbertsen, Philipp},
  issn         = {0377-7332},
  journal      = {EMPIRICAL ECONOMICS},
  keyword      = {Real exchange rates,PPP,unit root test,Markov Switching,ESTAR},
  language     = {eng},
  number       = {2},
  pages        = {457--474},
  title        = {What do we know about real exchange rate nonlinearities?},
  url          = {http://dx.doi.org/10.1007/s00181-010-0431-2},
  volume       = {43},
  year         = {2012},
}

Chicago
Kruse, Robinson, Michael Frömmel, Lukas Menkhoff, and Philipp Sibbertsen. 2012. “What Do We Know About Real Exchange Rate Nonlinearities?” Empirical Economics 43 (2): 457–474.
APA
Kruse, Robinson, Frömmel, M., Menkhoff, L., & Sibbertsen, P. (2012). What do we know about real exchange rate nonlinearities? EMPIRICAL ECONOMICS, 43(2), 457–474.
Vancouver
1.
Kruse R, Frömmel M, Menkhoff L, Sibbertsen P. What do we know about real exchange rate nonlinearities? EMPIRICAL ECONOMICS. 2012;43(2):457–74.
MLA
Kruse, Robinson, Michael Frömmel, Lukas Menkhoff, et al. “What Do We Know About Real Exchange Rate Nonlinearities?” EMPIRICAL ECONOMICS 43.2 (2012): 457–474. Print.