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A Fractional Cointegration Analysis of Purchasing Power Parity

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  • Cheung, Yin-Wong
  • Lai, Kon S

Abstract

A generalized.notion of cointegration, called fractional cointegration, is introduced to examine the long-run purchasing power parity hypothesis. By allowing deviations from equilibrium to follow a fractional process, the fractional cointegration analysis can capture a wider range of mean reversion behavior than standard cointegration analyses. This gain in flexibil ity in modeling mean-reverting dynamics is found to be important for evaluating long-run purchasing power parity. Empirical results show that purchasing power parity reversion exists and can be characterized by a fractional process for several countries studied. The results support purchasing power parity as a long-run phenomenon, though significant short-run deviations can exist.

Suggested Citation

  • Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-112, January.
    • Handle: RePEc:bes:jnlbes:v:11:y:1993:i:1:p:103-12
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