Cointegration, Fractional Cointegration, and Exchange Rate Dynamics

Authors

  • RICHARD T. BAILLIE,

  • TIM BOLLERSLEV

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    • Ballie is from Michigan State University and Bollerslev is from Northwestern University and NBER. The authors would like to thank an anonymous referee, Frank Diebold and René Stulz (the editor) for helpful comments.

ABSTRACT

Multivariate tests due to Johansen (1988, 1991) as implemented by Baillie and Bollerslev (1989a) and Diebold, Gardeazabal, and Yilmaz (1994) reveal mixed evidence on whether a group of exchange rates are cointegrated. Further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process. Hence, the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons.

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