Nonlinear Real Exchange Rate Adjustments: Insights from iPad Price Data

Hylton Hollander (), Rick Walker (), Dawie van Lill () and Gideon du Rand ()

ERSA Working Paper Series, 2024

Abstract: We investigate nonlinear real exchange rate (RER) dynamics using a high-frequency panel dataset of Apple iPad prices across global markets. Our findings challenge the conventional view of slow RER adjustment by demonstrating that larger mispricings are corrected much faster, while smaller deviations persist for longer periods. We identify a valuation threshold effect, where smaller deviations behave like unit root processes, while larger discrepancies are more quickly mean-reverting. Furthermore, the magnitude of these thresholds diminishes as the time horizon of evaluation increases. Transaction costs play a crucial role in shaping these dynamics, with higher costs associated with wider thresholds for arbitrage activity. Additionally, the results reveal asymmetry in RER adjustments, where undervaluations are corrected more rapidly than overvaluations. These findings provide new insights into the speed and nature of RER adjustments, suggesting that product-specific price data, such as that from iPads, can offer a more granular understanding of international price convergence.

Keywords: Nonlinear Real Exchange Rate Adjustments; Law of One Price (LOP); High-Frequency Data; Threshold Effects; Apple iPads (search for similar items in EconPapers)
Date: 2024
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