Generalized long memory processes, failure of cointegration tests and exchange rate dynamics

Stefan Norrbin and Aaron Smallwood

Journal of Applied Econometrics, 2006, vol. 21, issue 4, 409-417

Abstract: This paper presents evidence that the equilibrium relationship in a system of nominal exchange rates is best described as a stationary GARMA process. The implementation of the GARMA methodology helps explain conflicting and puzzling results from the use of linear cointegration and fractional cointegration methods. Furthermore, we use Monte Carlo analysis to document problems with standard cointegration tests when the attraction process is distributed as a long memory GARMA process. Copyright © 2006 John Wiley & Sons, Ltd.

Date: 2006
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DOI: 10.1002/jae.857

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