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On cointegration and exchange rate dynamics

Author

Listed:
  • Francis X. Diebold
  • Javier Gardeazabal
  • Kamil Yilmaz
Abstract
Richard T. Baillie and Tim Bollerslev (1989) have recently argued that nominal dollar spot exchange rates are cointegrated. Here the authors examine an immediate implication of their finding, namely, that cointegration implies an error-correction representation yielding forecasts superior to those from a martingale benchmark in light of a large earlier literature highlighting the predictive superiority of the martingale. In an out-of-sample forecasting exercise, the authors find the martingale model to be superior. They then perform a battery of improved cointegration tests and find that the evidence for cointegration is much less strong than previously thought, a result consistent with the outcome of the forecasting exercise. Copyright 1994 by American Finance Association.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Francis X. Diebold & Javier Gardeazabal & Kamil Yilmaz, 1993. "On cointegration and exchange rate dynamics," Working Papers 93-2, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:93-2
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    Keywords

    Foreign exchange rates;

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