An Empirical Analysis of Nonstationarity in Panels of Exchange Rates and Interest Rates with Factors

50 Pages Posted: 16 Nov 2005

See all articles by Hyungsik Roger Moon

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

Benoit Perron

University of Montreal - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - Center for Interuniversity Research in Econometrics

Date Written: August 2005

Abstract

This paper studies nonstationarities in panels of exchange rates and interest rates. For this, we survey developments in the analysis of nonstationary panels with cross-sectional dependence modeled as a factor model. We focus on panel unit root tests and on inference on the nonstationary factors.

Our results suggest that PPP does not hold for our panel of 17 exchange rates due to the presence of nonstationary factors. The dominant factor has a very strong European flavor. Moreover, we find a single nonstationary factor in a panel of Canadian and U.S. interest rates of different maturities and risk. Since some of the idiosyncratic components are stationary, these series are cointegrated. The dominant factor has a level interpretation as in the term structure literature.

Suggested Citation

Moon, Hyungsik Roger and Perron, Benoit, An Empirical Analysis of Nonstationarity in Panels of Exchange Rates and Interest Rates with Factors (August 2005). IEPR Working Paper No. 05.35, Available at SSRN: https://ssrn.com/abstract=848767 or http://dx.doi.org/10.2139/ssrn.848767

Hyungsik Roger Moon (Contact Author)

University of Southern California - Department of Economics ( email )

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USC Dornsife Institute for New Economic Thinking ( email )

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Benoit Perron

University of Montreal - Department of Economics ( email )

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Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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University of Montreal - Center for Interuniversity Research in Econometrics ( email )

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