Threshold Adjustment of Deviations from the Law of One Price
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Luciana Juvenal
Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We find strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rate shocks, calculated by Monte Carlo integration, imply much faster adjustment than the 'consensus' half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Articles in the same Issue
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- Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?
- A Powerful Test for Linearity When the Order of Integration is Unknown
- Optimal Test for Markov Switching GARCH Models
- Bayesian Simultaneous Determination of Structural Breaks and Lag Lengths
- Is the Backward-Looking Component Important in a New Keynesian Phillips Curve?
- Reconsideration of the Markov Chain Evidence on Unemployment Rate Asymmetry
- Markov-Switching GARCH Modelling of Value-at-Risk
- Threshold Adjustment of Deviations from the Law of One Price
Articles in the same Issue
- Article
- Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?
- A Powerful Test for Linearity When the Order of Integration is Unknown
- Optimal Test for Markov Switching GARCH Models
- Bayesian Simultaneous Determination of Structural Breaks and Lag Lengths
- Is the Backward-Looking Component Important in a New Keynesian Phillips Curve?
- Reconsideration of the Markov Chain Evidence on Unemployment Rate Asymmetry
- Markov-Switching GARCH Modelling of Value-at-Risk
- Threshold Adjustment of Deviations from the Law of One Price
