Mean Reversion Properties in Real Effective Exchange Rates

38 Pages Posted: 27 Aug 2018 Last revised: 1 Nov 2018

See all articles by Tim Glaus

Tim Glaus

University of Zurich - Department of Banking and Finance

Alexander Thoma

University of Zurich - Department of Banking and Finance

Date Written: December 29, 2017

Abstract

In recent years, advances in the field of unit root tests helped to partially solve the first purchasing power parity puzzle. Non-linear mean-reversion tests with real exchange rates were able to reject the null of a unit root (indicating mean reversion) in significantly more cases than the standard linear tests. These papers suffer from two problems: small samples and sensitivity of numeraire currency. This study investigates the mean reversion property of real effective exchange rates, which are robust to the choice of numeraire. In a large sample of 96 countries, we show that mean reversion is present in approximately 60 % of all countries depending on the underlying timeseries model.

Keywords: currency value, real effective exchange rates, purchasing power parity, currency returns, forward premium puzzle, uncovered interest rate parity

JEL Classification: F31, F32, E01, E44, E71, G15.

Suggested Citation

Glaus, Tim and Thoma, Alexander, Mean Reversion Properties in Real Effective Exchange Rates (December 29, 2017). Available at SSRN: https://ssrn.com/abstract=3231865 or http://dx.doi.org/10.2139/ssrn.3231865

Tim Glaus

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Alexander Thoma (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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