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Using a VECM to test exogeneity and forecastability in the PPP condition

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  • Stefan Norrbin
  • Kevin Reffett
  • Yaohua Ji

Abstract

The possibility is explored that purchasing power parity (PPP) can be useful in forecasting exchange rates and/or prices. The first step shows that the spot exchange rate is statistically exogenous in the PPP relationship. The next step investigates the forecastability of the variables in the PPP condition. The results show that a VECM can beat a random walk only in the case of the US price level.

Suggested Citation

  • Stefan Norrbin & Kevin Reffett & Yaohua Ji, 1997. "Using a VECM to test exogeneity and forecastability in the PPP condition," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 87-95.
    • Handle: RePEc:taf:apfiec:v:7:y:1997:i:1:p:87-95
    DOI: 10.1080/096031097333871
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    References listed on IDEAS

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    Cited by:

    1. Woo, Kai-Yin, 1999. "Cointegration analysis of the intensity of the ERM currencies under the European Monetary System," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(4), pages 393-405, November.
    2. Ostermark, Ralf, 2001. "Multivariate cointegration analysis of the Finnish-Japanese stock markets," European Journal of Operational Research, Elsevier, vol. 134(3), pages 498-507, November.
    3. Bergman, U. Michael & Hansson, Jesper, 2005. "Real exchange rates and switching regimes," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 121-138, February.

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