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Parity theorems revisited: an ARDL bound test with non-parity factors


Citation

Syed Mohamed, Mohamed Ariff and Zarei, Alireza (2015) Parity theorems revisited: an ARDL bound test with non-parity factors. Asian Academy of Management Journal of Accounting and Finance, 11 (1). pp. 1-26. ISSN 1823-4992; ESSN: 2180-4192

Abstract

The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availability of powerful econometric approaches to resolve unsolved issues. We re-examine the exchange rate behaviour of the US economy, applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139 per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over 1960–2014 is consistent with parity and non-parity theories.


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Official URL or Download Paper: http://web.usm.my/journal/aamjaf/11-1-1-2015.html

Additional Metadata

Item Type: Article
Divisions: Faculty of Economics and Management
Publisher: Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia
Keywords: ARDL; Bound test; Exchange rate; Prices; Interest rates; Speed of adjustment; Non-parity factors
Depositing User: Nabilah Mustapa
Date Deposited: 31 Jul 2017 09:17
Last Modified: 31 Jul 2017 09:17
URI: http://psasir.upm.edu.my/id/eprint/56411
Statistic Details: View Download Statistic

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