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Generalized long memory processes, failure of cointegration tests and exchange rate dynamics

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  • Stefan C. Norrbin

    (Florida State University, Tallahassee, FL, USA)

  • Aaron D. Smallwood

    (University of Oklahoma, Norman, OK, USA)

Abstract

This paper presents evidence that the equilibrium relationship in a system of nominal exchange rates is best described as a stationary GARMA process. The implementation of the GARMA methodology helps explain conflicting and puzzling results from the use of linear cointegration and fractional cointegration methods. Furthermore, we use Monte Carlo analysis to document problems with standard cointegration tests when the attraction process is distributed as a long memory GARMA process. Copyright © 2006 John Wiley & Sons, Ltd.

Suggested Citation

  • Stefan C. Norrbin & Aaron D. Smallwood, 2006. "Generalized long memory processes, failure of cointegration tests and exchange rate dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(4), pages 409-417.
    • Handle: RePEc:jae:japmet:v:21:y:2006:i:4:p:409-417
    DOI: 10.1002/jae.857
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    References listed on IDEAS

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    1. Andersson, Michael K. & Gredenhoff, Mikael P., 1999. "On the maximum likelihood cointegration procedure under a fractional equilibrium error," Economics Letters, Elsevier, vol. 65(2), pages 143-147, November.
    2. D Marinucci & Peter M Robinson, 2001. "Semiparametric Fractional Cointegration Analysis," STICERD - Econometrics Paper Series 420, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    4. Diebold, Francis X & Gardeazabal, Javier & Yilmaz, Kamil, 1994. "On Cointegration and Exchange Rate Dynamics," Journal of Finance, American Finance Association, vol. 49(2), pages 727-735, June.
    5. John Barkoulas & Christopher F. Baum & Gurkan S. Oguz, 1996. "Fractional Cointegration Analysis of Long Term International Interest Rates," Boston College Working Papers in Economics 315., Boston College Department of Economics.
    6. Marinucci, D & Robinson, Peter M., 2001. "Semiparametric fractional cointegration analysis," LSE Research Online Documents on Economics 2269, London School of Economics and Political Science, LSE Library.
    7. Erhard Reschenhofer & Benedikt M. Pötscher & Michael A. Hauser, 1999. "Measuring persistence in aggregate output: ARMA models, fractionally integrated ARMA models and nonparametric procedures," Empirical Economics, Springer, vol. 24(2), pages 243-269.
    8. Marinucci, D. & Robinson, P. M., 2001. "Semiparametric fractional cointegration analysis," Journal of Econometrics, Elsevier, vol. 105(1), pages 225-247, November.
    9. Henry L. Gray & Nien‐Fan Zhang & Wayne A. Woodward, 1989. "On Generalized Fractional Processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 10(3), pages 233-257, May.
    10. 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.
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    Cited by:

    1. Aaron Smallwood & Stefan C. Norrbin, 2008. "An Encompassing Test of Real Interest Rate Equalization," Review of International Economics, Wiley Blackwell, vol. 16(1), pages 114-126, February.
    2. Stefan Norrbin & Aaron Smallwood, 2010. "Generalized long memory and mean reversion of the real exchange rate," Applied Economics, Taylor & Francis Journals, vol. 42(11), pages 1377-1386.
    3. Beaumont, Paul & Smallwood, Aaron, 2019. "Conditional Sum of Squares Estimation of Multiple Frequency Long Memory Models," MPRA Paper 96314, University Library of Munich, Germany.

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