A Fractional Cointegration Analysis of Purchasing Power Parity

Yin-Wong Cheung and Kon S Lai

Journal of Business & Economic Statistics, 1993, vol. 11, issue 1, 103-12

Abstract: A generalized.notion of cointegration, called fractional cointegration, is introduced to examine the long-run purchasing power parity hypothesis. By allowing deviations from equilibrium to follow a fractional process, the fractional cointegration analysis can capture a wider range of mean reversion behavior than standard cointegration analyses. This gain in flexibil ity in modeling mean-reverting dynamics is found to be important for evaluating long-run purchasing power parity. Empirical results show that purchasing power parity reversion exists and can be characterized by a fractional process for several countries studied. The results support purchasing power parity as a long-run phenomenon, though significant short-run deviations can exist.

Date: 1993
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