Nonlinear dynamics in deviations from the law of one price: A broad-based empirical study

Journal of International Money and Finance

Volumn 23, Issue 1, 2004, Pages 1-25

  Sarno, Lucio ^a,b   Taylor, Mark P ^b,c   Chowdhury, Ibrahim ^d  

^a UNIVERSITY OF WARWICK   (United Kingdom)

^b CEPR   (United Kingdom)

^c UNIVERSITY OF WARWICK   (United Kingdom)

^d UNIVERSITY OF OXFORD   (United Kingdom)

Author keywords

Law of one price; Mean reversion; Purchasing power parity; Real exchange rate; Threshold nonlinearity

Indexed keywords

EID: 0347592568     PISSN: 02615606     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jimonfin.2003.10.004     Document Type: Article

References (70)

1. Andrews D.W.K. Ploberger W. Optimal tests when a nuisance parameter is present only under the alternative Econometrica 62 1994 1383-1414
2. Balke N.S. Fomby T.B. Threshold cointegration International Economic Review 38 1997 627-645
3. Benninga S. Protopapadakis A.A. The equilibrium pricing of exchange rates and assets when trade takes time Journal of International Economics 7 1988 129-149
4. Bergin P.R. Feenstra R.C. Pricing-to-market, staggered contracts and real exchange rate persistence Journal of International Economics 54 2001 333-359
5. Betts C. Devereux M.B. Exchange rate dynamics in a model of pricing-to-market Journal of International Economics 50 2000 215-244
6. Brock W.A. Dechert W.D. Scheinkman J. Nonlinear Dynamics, Chaos And Instability 1991 MIT Press Cambridge, MA
7. Cassel G. Money and Foreign Exchange after 1914 1922 Constable London
8. Cheung Y.-W. Lai K.S. A fractional cointegration analysis of purchasing power parity Journal of Business and Economic Statistics 11 1993a 103-112
9. Cheung Y.-W. Lai K.S. Long-run purchasing power parity during the recent float Journal of International Economics 34 1993b 181-192
10. Cheung Y.-W. Lai K.S. On cross-country differences in the persistence of real exchange rates Journal of International Economics 50 2000a 375-397
11. Cheung Y.-W. Lai K.S. On the purchasing power parity puzzle Journal of International Economics 52 2000 321-330
12. Cheung Y.-W. Chinn M. Fujii E. Market structure and the persistence of sectoral real exchange rates International Journal of Finance and Economics 6 2001 95-114
13. Coakley J. Fuertes A.M. New panel unit root tests of PPP Economics Letters 57 1997 17-22
14. Coleman, A.M.G., 1995. Arbitrage, storage and the law of one price: new theory for the time series analysis of an old problem. Discussion Paper, Department of Economics, Princeton University.
15. Davies R.B. Hypothesis testing when a nuisance parameter is present only under the alternative Biometrika 64 1977 247-254
16. Davies R.B. Hypothesis testing when a nuisance parameter is present only under the alternative Biometrika 74 1987 33-43
17. Davutyan N. Pippenger J. Testing purchasing power parity: some evidence of the effects of transactions costs Econometric Reviews 9 1990 211-240
18. Dixit A.K. Hysteresis, import penetration and exchange rate pass-through Quarterly Journal of Economics 104 1989 205-228
19. Dumas B. Dynamic equilibrium and the real exchange rate in spatially separated world Review of Financial Studies 5 1992 153-180
20. Edison H.J. Gagnon J.E. Melick W.R. Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era Journal of International Money and Finance 16 1997 1-17
21. Engel C. Real exchange rates and relative prices: an empirical investigation Journal of Monetary Economics 32 1993 35-50
22. Engel C. Rogers J.H. How wide is the border? American Economic Review 86 1996 1112-1125
23. Feenstra R.C. Exact hedonic price indexes Review of Economics and Statistics 77 1995 634-653
24. Feenstra R.C. Kendall J.D. Pass-through of exchange rates and purchasing power parity Journal of International Economics 43 1997 237-261
25. Froot K.A. Rogoff K. Perspectives on PPP and long-run real exchange rates In: Rogoff K. Grossman G. (Eds.), Handbook of International Economics 1995
26. Froot, K.A., Kim, M., Rogoff, K., 1995. The Law of one price over 700 years. National Bureau of Economic Research, Working Paper No. 5132.
27. Giovannini A. Exchange rates and traded goods prices Journal of International Economics 24 1988 45-68
28. Granger C.W.J. Lee T.-H. The Effect of aggregation on nonlinearity Econometric Reviews 18 1999 259-266
29. Granger C.W.J. Teräsvirta T. Modelling Nonlinear Economic Relationships 1993 Oxford University Press Oxford, UK
30. Heckscher E.F. Växelkursens grundval vid pappersmyntfot Ekono-misk Tidskrift 18 1916 309-312
31. Hansen B.E. Inference when a nuisance parameter is not identified under the null hypothesis Econometrica 64 1996 413-430
32. Hansen B.E. Inference in TAR models Studies in Nonlinear Dynamics and Econometrics 2 1997 1-14
33. Hendry D.F. Monte Carlo experimentation in econometrics In: Griliches Z. Intrilligator M.D. (Eds.), Handbook of Econometrics 1984 North-Holland Amsterdam
34. Isard P. How far can we push the "law of one price"? American Economic Review 67 1977 942-948
35. Knetter M.M. Price discrimination by US and German exporters American Economic Review 79 1989 198-210
36. Knetter M.M. International comparisons of price-to-market behaviour American Economic Review 83 1993 473-486
37. Knetter M.M. Did the strong dollar increase competition in US product markets? Review of Economics and Statistics 76 1994 192-195
38. Krugman P.R. Pricing to market when the exchange rate changes In: Arndt S.W. Richardson J.D. (Eds.), Real-Financial Linkages Among Open Economies 1987 49-70 MIT Press Cambridge, MA
39. Krugman P.R. Exchange Rate Instability 1989 MIT Press Cambridge, MA
40. Lothian J.R. Multi-country evidence on the behavior of purchasing power parity under the current float Journal of International Money and Finance 16 1997 19-35
41. Lothian J.R. Taylor M.P. Real exchange rate behaviour: the recent float from the perspective of the past two centuries Journal of Political Economy 104 1996 488-510
42. Lothian J.R. Taylor M.P. Purchasing power parity over two centuries: strengthening the case for real exchange rate stability Journal of International Money and Finance 19 2000 759-764
43. Michael P. Nobay A.R. Peel D.A. Purchasing power parity yet again: evidence from spatially separated markets Journal of International Money and Finance 13 1994 637-657
44. Michael P. Nobay A.R. Peel D.A. Transactions costs and nonlinear adjustment in real exchange rates: an empirical investigation Journal of Political Economy 105 1997 862-879
45. Obstfeld M. Rogoff K. The six major puzzles in international macroeconomics: is there a common cause? In: Bernanke B. Rogoff K. (Eds.), National Bureau of Economic Research Macroeconomics Annual 2000 2000 NBER and MIT Press Cambridge, MA
46. Obstfeld M. Taylor A.M. Nonlinear aspects of goods-market arbitrage and adjustment: Heckscher's commodity points revisited Journal of the Japanese and International Economies 11 1997 441-479
47. O'Connell P.G.J. Market frictions and real exchange rates Journal of International Money and Finance 17 1998 71-95
48. O'Connell P.G.J. Wei S.-J. The Bigger they are, the harder they fall: retail price differences across US cities Journal of International Economics 56 2002 21-53
49. Officer L.H. Purchasing Power Parity and Exchange Rates: Theory, Evidence and Relevance 1982 JAI Press Greenwich, CT
50. Ohanian, L.E., Stockman, A.C., 1997. Arbitrage costs and exchange rates. Discussion Paper, Department of Economics, University of Rochester, Mimeo.
51. Parsley D.C. Wei S.-J. Convergence to the law of one price without trade barriers or currency fluctuations Quarterly Journal of Economics 111 1996 1211-1236
52. Pippenger M.K. Goering G.E. A note on the empirical power of unit root tests under threshold processes Oxford Bulletin of Economics and Statistics 55 1993 473-481
53. Prakash, G., Taylor, A.M., 1997. Measuring market integration: a model of arbitrage with an econometric application to the gold standard, 1879-1913. National Bureau of Economic Research Working Paper No. 6073, June.
54. Ramsey J.B. Tests for specification errors in classical least-squares regression analysis Journal of the Royal Statistical Analysis Series B 31 1969 350-371
55. Richardson J.D. Some empirical evidence on commodity arbitrage and the law of one price Journal of International Economics 8 1978 341-351
56. Rogoff R. The purchasing power parity puzzle Journal of Economic Literature 34 1996 647-668
57. Samuelson P. The transfer problem and transport costs: analysis of the effects of impediments Economic Journal 65 1954 264-289
58. Sarno L. Real exchange rate behaviour in the middle east: a re-examination Economics Letters 66 2000a 127-136
59. Sarno L. Systematic sampling and real exchange rates Weltwirtschalftliches Archiv 136 2000b 24-57
60. Sarno L. Toward a new paradigm in open economy modeling: where do we stand? Federal Reserve Bank of St. Louis Review 83 2001 21-36
61. Sarno, L., Taylor, M.P., 2002. Purchasing power parity and the real exchange rate. International Monetary Fund Staff Papers 49, 65-105.
62. Sercu P. Uppal R. Van Hulle C. The exchange rate in the presence of transactions costs: implications for tests of purchasing power parity Journal of Finance 50 1995 1309-1319
63. Taylor, A.M., 2002. A century of purchasing power parity. Review of Economics and Statistics 84,139-150.
64. Taylor A.M. Potential pitfalls for the purchasing power parity puzzle? Sampling and specification biases in mean reversion tests of the law of one price Econometrica 69 2001 473-498
65. Taylor M.P. Sarno L. The behaviour of real exchange rates during the post-Bretton Woods period Journal of International Economics 46 1998 281-312
66. Taylor M.P. Peel D.A. Sarno L. Nonlinear mean-reversion in real exchange rates: towards a solution to the purchasing power parity puzzles International Economic Review 42 2001 1015-1042
67. Tjostheim D. Estimation in nonlinear time series models Stochastic Processes and Their Applications 21 1986 251-273
68. Tong H. Threshold Models in Nonlinear Time Series Analysis 1983 Springer-Verlag New York, NY
69. Tong H. Nonlinear Time Series: A Dynamical System Approach 1990 Clarendon Press Oxford, UK
70. Tsay R.S. Testing and modelling threshold autoregressive processes Journal of the American Statistical Association 84 1989 231-240