EconPapers    
Economics at your fingertips  
 

Strong comovements of exchange rates: Theoretical and empirical cases when currencies become the same asset

Michael Kühl ()

No 76, Center for European, Governance and Economic Development Research Discussion Papers from University of Goettingen, Department of Economics

Abstract: The aim of this paper is to detect periods in which two currencies can be classified as being the'same' asset. Two currencies can be treated as the same asset if their exchange rates vis-à-vis the same base currency are cointegrated with a cointegration vector that is consistent with the triangular arbitrage condition. In a first step, it is theoretically derived under which conditions,with respect to the process of the fundamentals, the exchange rates are cointegrated. The empirical results yield that periods of strong comovements of the US dollar and Pound sterling based upon the Euro prevail during the 1990s and periods of comovements of Euro and Pound sterling denominated in US dollar prevail since the introduction of the Euro. Furthermore, no long-run relationships canbe discovered. This paper gives four major innovations to the literature. It first shows under which conditions exchange rates can be bivariately cointegrated. Secondly, it uses the cross-rate identity to test forcointegration, i.e. deducing recursively. Thirdly, it applies the cointegration methodology within atriangular framework by detecting cointegration between exchange rates that are not only denominated in U.S. dollars. And lastly, it shows that comovements between two exchange rates exist ina narrower sense but only in short periods, whereas the economic variables which have caused therelationship are explored.

Keywords: Foreign Exchange Market; Comovements; Cointegration; Long-Memory (search for similar items in EconPapers)
JEL-codes: E44 F31 G15 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/31989/1/585596816.pdf (application/pdf)

Related works:
Working Paper: Strong Comovements of Exchange Rates: Theoretical and Empirical Cases when Currencies Become the Same Asset Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cegedp:76

Access Statistics for this paper

More papers in Center for European, Governance and Economic Development Research Discussion Papers from University of Goettingen, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().

 
Page updated 2020-06-25
Handle: RePEc:zbw:cegedp:76