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Purchasing power parity under high and low volatility regimes

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  • Ming-Yuan Leon Li

Abstract

This article adopts Markov switching models to establish and examine several types of nonlinear dynamics in exchange rate returns and provide a new test to analyse presence of purchasing power parity (PPP) after controlling for various market states. In contrast with Engle and Hamilton (1990) focusing on discussing the dual state setting on the first moment of quarterly data for major industrial countries' currencies, we concentrate more on the second moment for monthly data and add an analysis of developing countries' currencies. Our empirical findings are consistent with the following notions. First, volatility-switching behaviours are more (less) remarkable for developing (industrialized) countries' currencies. Second, we denote the high volatility state of exchange markets of developing (industrialized) countries as a crisis (an unusual) condition. Moreover, PPP would be valid at the low (high) volatility state for developing (industrialized) countries.

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  • Ming-Yuan Leon Li, 2007. "Purchasing power parity under high and low volatility regimes," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 581-589.
    • Handle: RePEc:taf:apeclt:v:14:y:2007:i:8:p:581-589
    DOI: 10.1080/13504850500461548
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    References listed on IDEAS

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    1. Frenkel, Jacob A., 1981. "The collapse of purchasing power parities during the 1970's," European Economic Review, Elsevier, vol. 16(1), pages 145-165.
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    8. D. A. Peel & I. A. Venetis, 2003. "Purchasing power parity over two centuries: trends and nonlinearity," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 609-617.
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    Cited by:

    1. Chi-Wei Su & Tsangyao Chang & Yu-Shao Liu, 2012. "Revisiting purchasing power parity for African countries: with nonlinear panel unit-root tests," Applied Economics, Taylor & Francis Journals, vol. 44(25), pages 3263-3273, September.
    2. Li, Ming-Yuan Leon, 2009. "Value or volume strategy?," Finance Research Letters, Elsevier, vol. 6(4), pages 210-218, December.
    3. Ming-Yuan Leon Li, 2009. "Nonlinear interrelations between ADRs and their underlying stocks revisited: application of threshold VECM," Applied Economics Letters, Taylor & Francis Journals, vol. 16(18), pages 1867-1873.
    4. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.
    5. Giannellis, Nikolaos & Koukouritakis, Minoas, 2013. "Exchange rate misalignment and inflation rate persistence: Evidence from Latin American countries," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 202-218.
    6. Ming-Yuan Leon Li, 2008. "Hybrid versus highbred: combined economic models with time-series analyses," Quantitative Finance, Taylor & Francis Journals, vol. 8(6), pages 637-647.

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