 Trade intensity and purchasing power parityDooyeon Cho and Antonio Doblas-Madrid Journal of International Economics, 2014, vol. 93, issue 1, 194-209 Abstract: In this paper, we seek to contribute to the PPP literature by presenting evidence of a link between trade intensity and exchange rate dynamics. We first establish a negative effect of trade intensity on exchange rate volatility using panel regressions, with distance as an instrument to correct for endogeneity. We also estimate a nonlinear model of mean reversion to compute half-lives of deviations of bilateral exchange rates from the levels dictated by relative PPP, and find these half-lives to be significantly shorter for high trade intensity currency pairs. This result does not appear to be driven by Central Bank intervention. Finally, we show that conditioning on PPP may help improve the performance of popular currency trading strategies, such as the carry trade, especially for low trade intensity currency pairs. Keywords: Trade intensity; Deviations from PPP; Exchange rate volatility; Carry trades; Mean reversion (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:93:y:2014:i:1:p:194-209 DOI: 10.1016/j.jinteco.2014.01.007 Access Statistics for this article Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés More articles in Journal of International Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.