Reconsidering Cointegration in International Finance: Three Case Studies of Size Distortion in Finite Samples

Bank of Canada Working Paper No. 97-1

34 Pages Posted: 13 Mar 1998  

Marie-Josee Godbout

affiliation not provided to SSRN

Simon van Norden

HEC Montreal - Department of Finance; CIRANO; University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: January 1997

Abstract

This paper reconsiders several recently published but controversial results about the behavior of exchange rates. In particular, it explores finite-sample problems in the application of cointegration tests and shows how these may have affected the conclusions of recent research. It also demonstrates how simple simulation methods may be used to check the robustness of cointegration tests in particular applied settings and provides information on the potential sources of size distortion in these tests.

Three case studies are presented. The first is the literature on cointegration and prediction of nominal spot exchange rates spawned by Baillie and Bollerslev (1989). The second is work on the long-run validity of the monetary model of exchange rate determination, particularly the contributions of MacDonald and Taylor (1993; 1994a). The final case study looks at the evidence presented by Kasa (1992) on common stochastic trends in the international stock market. Our results suggest that Baillie and Bollerslev's results are unaffected by finite-sample problems, but that the opposite is true for the other two case studies.

JEL Classification: C15, C22, C32, F31

Suggested Citation

Godbout, Marie-Josee and van Norden, Simon, Reconsidering Cointegration in International Finance: Three Case Studies of Size Distortion in Finite Samples (January 1997). Bank of Canada Working Paper No. 97-1. Available at SSRN: https://ssrn.com/abstract=49733 or http://dx.doi.org/10.2139/ssrn.49733

Marie-Josee Godbout (Contact Author)

affiliation not provided to SSRN

Simon Van Norden

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6781 (Phone)
514-340-5632 (Fax)

HOME PAGE: http://svannorden.org

CIRANO ( email )

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Montreal H3C 3J7, Quebec
Canada

HOME PAGE: http://svannorden.org

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

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