Testing Purchasing Power Parity Theory with the Hurst Exponent: The Case of 23 OECD Countries

12 Pages Posted: 6 Dec 2015

See all articles by Periklis Gogas

Periklis Gogas

Democritus University of Thrace - Department of Economics

Theophilos Papadimitriou

Department of Economics, Democritus University of Thrace

Georgios Sarantitis

Democritus University of Thrace - Department of Economics

Date Written: December 12, 2012

Abstract

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

Gogas, Periklis and Papadimitriou, Theophilos and Sarantitis, Georgios, Testing Purchasing Power Parity Theory with the Hurst Exponent: The Case of 23 OECD Countries (December 12, 2012). Applied Financial Economics, 23 (17), p.1399-1046, 2013. Available at SSRN: https://ssrn.com/abstract=2699220

Periklis Gogas

Democritus University of Thrace - Department of Economics ( email )

Komotini, 69100
Greece

HOME PAGE: http://www.econ.duth.gr/personel/dep/gkogkas/index.en.shtml

Theophilos Papadimitriou

Department of Economics, Democritus University of Thrace ( email )

University Campus
Komotini, 69100
Greece

HOME PAGE: http://econ.duth.gr/author/papadimi/

Georgios Sarantitis (Contact Author)

Democritus University of Thrace - Department of Economics ( email )

Komotini
Greece

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