Exchange rates and individual good's price misalignment: Evidence of long-horizon predictability
- Title
- Exchange rates and individual good's price misalignment: Evidence of long-horizon predictability
- Author
- 남덕우
- Keywords
- Exchange rates; In-sample forecasting; Price misalignments; Out-of-sample forecasting; Superior predictive ability test
- Issue Date
- 2013-02
- Publisher
- Elsevier Science B.V., Amsterdam.
- Citation
- Journal of international money and finance, 32, 611 - 636
- Abstract
- Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some individual goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. We collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model's predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. We find that the slope coefficients and R-squares of in-sample forecasting regressions for almost all goods in our data increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The results of tests for out-of-sample superior predictive ability suggest that our price-misalignment model outperforms a random walk model either with or without drift for the U.S. dollar vis-a-vis the Japanese yen at the 5 percent level of significance over long horizons. (C) 2012 Elsevier Ltd. All rights reserved.
- URI
- https://www.sciencedirect.com/science/article/pii/S0261560612001416?via%3Dihubhttp://hdl.handle.net/20.500.11754/44937
- ISSN
- 0261-5606
- DOI
- 10.1016/j.jimonfin.2012.06.003
- Appears in Collections:
- COLLEGE OF ECONOMICS AND FINANCE[S](경제금융대학) > ECONOMICS & FINANCE(경제금융학부) > Articles
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