Re-examining Cointegration, Unit Roots and Efficiency in Foreign Exchange Rates

Authors: Lajaunie, John P.¹; Naka, Atsuyuki²

Source: Journal of Business Finance & Accounting, Volume 24, Number 3, April 1997 , pp. 363-374(12)

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Abstract:

This paper examines the cointegrating relationships in seven foreign exchange rates for a sample period from 1974 to 1991 by utilizing Johansen's (1991) method. Three subperiods are also examined to confirm the intertemporal stability of the test results. In addition, subgroups of the seven exchange rates are analyzed to determine the consistency of the empirical results with respect to different dimensions in the system. We find that the test results are sensitive to the choice of test statistics, time trends, subperiods as well as subgroups. All results indicate either one or no cointegrating relationship exists. Further, we study time series properties of twenty one cross-currency rates and the corresponding exchange rates in terms of a common currency. None of cross-currency rates are stationary and hence the pairs of exchange rates are not cointegrated.

Keywords: cointegration; unit roots; foreign exchange efficiency; cross currency rates

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1468-5957.00109

Affiliations: 1: Associate Professor of Finance in the Department of Economics and Finance, Nicholls State University, Thiboduax, LA, 2: Associate Professor of Economics and Finance, University of New Orleans

Publication date: 1997-04-01