Testing Purchasing Power Parity Theory with the Hurst Exponent: The Case of 23 OECD Countries
12 Pages Posted: 6 Dec 2015
Date Written: December 12, 2012
We test the validity of Purchasing Power Parity theory, examining the Real Exchange Rate of 23 OECD countries for mean-reversion. In doing so, we estimate the Hurst exponent which is a well-established estimator of long memory in time series analysis. The innovation of our approach is that we employ the Detrended Fluctuation Analysis (DFA) for the estimation of Hurst on Real Exchange Rates bothin the full sample and also in rolling windows of three different sizes in an attempt to identify possible trends, breaks and the evolution of Hurst through time.
Keywords: Purchasing Power Parity, Real Exchange Rates, Hurst Exponent, Rolling Window, DFA
JEL Classification: F31, C22
Suggested Citation: Suggested Citation