Nikolaou, Kleopatra. (2008) The behaviour of the real exchange rate : Evidence from regression quantiles. Journal of Banking & Finance, Vol.32 (No.5). pp. 664-679. ISSN 0378-4266

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Abstract

We test for mean reversion in real exchange rates using a recently developed unit root test for non-normal processes based on quantile autoregression inference in semi-parametric and non-parametric settings. The quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate, conditional on its past history, and can detect asymmetric, dynamic adjustment of the real exchange rate towards its long run equilibrium. It, therefore provides a detailed mapping of the real exchange rate behaviour, while being a robust alternative to previous unit root tests. The latter is confirmed by a simulation analysis comparing the power of the alternative tests. As concerns the real exchange rate, our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate, with half lives less than one year in the extreme quantiles. Mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium. However, in the absence of shocks no mean reversion is observed. Finally, we report asymmetries in the dynamic adjustment of the RER. (C) 2007 Elsevier B.V. All rights reserved.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Foreign exchange rates, Purchasing power parity, Regression analysis
Journal or Publication Title:	Journal of Banking & Finance
Publisher:	Elsevier Science BV
ISSN:	0378-4266
Date:	May 2008
Volume:	Vol.32
Number:	No.5
Number of Pages:	16
Page Range:	pp. 664-679
Identification Number:	10.1016/j.jbankfin.2007.05.002
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/30025

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