Structural Break, Nonlinearity, and Asymmetry: A re-examination of PPP proposition

Omay, Tolga and Hasanov, Mubariz and Emirmahmutoglu, Furkan (2014): Structural Break, Nonlinearity, and Asymmetry: A re-examination of PPP proposition.

Abstract

In this study, we propose a new unit root test procedure that allows for both gradual structural break and asymmetric nonlinear adjustment towards the equilibrium level. Small-sample properties of the new test are examined through Monte-Carlo simulations. The simulation results suggest that the new test has satisfactory size and power properties. We then apply this new test along with other unit root tests to examine stationarity properties of real exchange rate series of the sample countries. Our test rejects the null of unit root in more cases when compared to alternative tests. Overall, we find that the PPP proposition holds in majority of the European countries examined in this paper.

• Item Type: MPRA Paper
• Language: English
• Keywords: Smooth Structural Break; Nonlinear Unit Root test; PPP
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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