Testing long-run PPP with infinite-variance returns

Barry Falk and Chun-Hsuan Wang
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Chun-Hsuan Wang: Department of Finance, Ming Chuan University, Taiwan, Postal: Department of Finance, Ming Chuan University, Taiwan

Journal of Applied Econometrics, 2003, vol. 18, issue 4, pages 471-484

Abstract: This paper investigates the long-run purchasing power parity hypothesis when exchange rate returns and inflation rates are assumed to be heavy-tailed stochastic processes. More specifically, residual-based and likelihood-ratio-based cointegration tests of PPP that explicitly allow for infinite-variance innovations are applied to monthly data (1973:1-1999:12) for Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. Our test results are marginally less supportive of PPP when the innovations are assumed to be infinite-variance, α-stable processes. Copyright © 2003 John Wiley & Sons, Ltd.

Date: 2003
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Working Paper: Testing Long-Run PPP with Infinite-Variance Returns (2003)
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