Parity theorems revisited: an ARDL bound test with non-parity factors
The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availa...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia
2015
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| Online Access: | http://psasir.upm.edu.my/id/eprint/56411/ http://psasir.upm.edu.my/id/eprint/56411/1/Parity%20theorems%20revisited%20an%20ARDL%20bound%20test%20with%20non-parity%20factors.pdf |
| _version_ | 1848853075655131136 |
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| author | Syed Mohamed, Mohamed Ariff Zarei, Alireza |
| author_facet | Syed Mohamed, Mohamed Ariff Zarei, Alireza |
| author_sort | Syed Mohamed, Mohamed Ariff |
| building | UPM Institutional Repository |
| collection | Online Access |
| description | The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availability of powerful econometric approaches to resolve unsolved issues. We re-examine the exchange rate behaviour of the US economy, applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139 per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over 1960–2014 is consistent with parity and non-parity theories. |
| first_indexed | 2025-11-15T10:48:12Z |
| format | Article |
| id | upm-56411 |
| institution | Universiti Putra Malaysia |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-15T10:48:12Z |
| publishDate | 2015 |
| publisher | Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | upm-564112017-07-31T09:17:24Z http://psasir.upm.edu.my/id/eprint/56411/ Parity theorems revisited: an ARDL bound test with non-parity factors Syed Mohamed, Mohamed Ariff Zarei, Alireza The research question addressed in this paper is, do inflation and interest rate differences across two major economies fully drive the long-run exchange rate changes if controls for non-parity factors are embedded? Exchange rate behaviour research is once again an interesting topic given the availability of powerful econometric approaches to resolve unsolved issues. We re-examine the exchange rate behaviour of the US economy, applying a more appropriate econometric model using 55 years of quarterly data. The model explains 96% of variation in exchange rates, which testifies to the model’s appropriateness. The error correction estimate indicates a time-to-equilibrium of 0.139 per quarter; that is, full adjustment takes seven quarters. Tests indicate evidence of a long-run relationship among the exchange rate, prices, and interest rates. The coefficients on both parity factors (prices and interest rates) are statistically significant with correct theory-suggested signs. These findings constitute strong evidence in support of parity and non-parity theorems while confirming that the US currency behaviour over 1960–2014 is consistent with parity and non-parity theories. Asian Academy of Management (AAM) and Penerbit Universiti Sains Malaysia 2015 Article PeerReviewed application/pdf en http://psasir.upm.edu.my/id/eprint/56411/1/Parity%20theorems%20revisited%20an%20ARDL%20bound%20test%20with%20non-parity%20factors.pdf Syed Mohamed, Mohamed Ariff and Zarei, Alireza (2015) Parity theorems revisited: an ARDL bound test with non-parity factors. Asian Academy of Management Journal of Accounting and Finance, 11 (1). pp. 1-26. ISSN 1823-4992; ESSN: 2180-4192 http://web.usm.my/journal/aamjaf/11-1-1-2015.html |
| spellingShingle | Syed Mohamed, Mohamed Ariff Zarei, Alireza Parity theorems revisited: an ARDL bound test with non-parity factors |
| title | Parity theorems revisited: an ARDL bound test with non-parity factors |
| title_full | Parity theorems revisited: an ARDL bound test with non-parity factors |
| title_fullStr | Parity theorems revisited: an ARDL bound test with non-parity factors |
| title_full_unstemmed | Parity theorems revisited: an ARDL bound test with non-parity factors |
| title_short | Parity theorems revisited: an ARDL bound test with non-parity factors |
| title_sort | parity theorems revisited: an ardl bound test with non-parity factors |
| url | http://psasir.upm.edu.my/id/eprint/56411/ http://psasir.upm.edu.my/id/eprint/56411/ http://psasir.upm.edu.my/id/eprint/56411/1/Parity%20theorems%20revisited%20an%20ARDL%20bound%20test%20with%20non-parity%20factors.pdf |