Cointegration, Fractional Cointegration, and Exchange Rate Dynamics

  • Author(s): RICHARD T. BAILLIE, TIM BOLLERSLEV
  • Published: Apr 30, 2012
  • Pages: 737-745
  • DOI: 10.1111/j.1540-6261.1994.tb05161.x

ABSTRACT

Multivariate tests due to Johansen (1988, 1991) as implemented by Baillie and Bollerslev (1989a) and Diebold, Gardeazabal, and Yilmaz (1994) reveal mixed evidence on whether a group of exchange rates are cointegrated. Further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process. Hence, the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons.

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