Currency Indexes and Consistent Currency Misvaluation: Illustrations using Big Mac Data

Research in International Business and Finance, April 2019, 464-474

26 Pages Posted: 24 Apr 2016 Last revised: 4 Apr 2019

See all articles by Thomas J. O'Brien

Thomas J. O'Brien

University of Connecticut - Department of Finance

Santiago Ruiz de Vargas

NOERR AG WPG StBG - Advisory Services

Date Written: September 13, 2018

Abstract

A currency’s misvaluation versus an index of other currencies, termed the currency’s multilateral misvaluation, depends on the index weights. This study clarifies the idea of consistency in multilateral misvaluation and provides instructive empirical illustrations using several currency index weighting methods. For both of the Economist’s Big Mac approaches (“raw” and Adjusted) to intrinsic foreign exchange value, the study finds that a multilateral currency misvaluation estimate based on an equal-weight index does not necessarily provide a reasonable approximation to the estimate of a more economically-meaningful currency index.

Keywords: Exchange rates; currency misvaluation; currency index; Big Mac

JEL Classification: F31

Suggested Citation

O'Brien, Thomas J. and Ruiz de Vargas, Santiago, Currency Indexes and Consistent Currency Misvaluation: Illustrations using Big Mac Data (September 13, 2018). Research in International Business and Finance, April 2019, 464-474. Available at SSRN: https://ssrn.com/abstract=2768239 or http://dx.doi.org/10.2139/ssrn.2768239

Thomas J. O'Brien (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3041 (Phone)
860-486-0634 (Fax)

HOME PAGE: http://www.business.uconn.edu/staff.asp?id=57

Santiago Ruiz de Vargas

NOERR AG WPG StBG - Advisory Services ( email )

Brienner Str. 28
Munich, Bavaria 80333
Germany
+4989286280 (Phone)

HOME PAGE: http://www.noerr.com

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