Panayiotis F. Diamandis

Market efficiency, purchasing power parity, and the official and parallel markets for foreign currency in Latin America

Abstract This paper examines the purchasing power parity (PPP) theory from a long-run perspective in the presence of a parallel or ‘black’ market for U.S. dollars in four Latin American countries, namely Argentina, Brazil, Chile, and Mexico, using monthly data for the recent float. Johansens full information maximum likelihood multivariate cointegration technique is applied. Recent developments associated with this procedure are considered. First, a formal test developed by Johansen [Econometric Theory 8 (1992) 188, Econometric Theory 11 (1995) 25, Scand. J. Stat. 24 (1997) 433] for the presence of I (2) and I (1) components in a multivariate context is applied along with the estimation of the roots of the companion matrix for the correct determination of the cointegration rank. Second, given that two significant cointegration vectors were found for any country, structural restrictions identifying the long-run relations of interest are specified as proposed by Johansen and Juselius [J. Econometrics 63 (1994) 7] and Johansen [J. Econometrics 69 (1995) 111]. Thus, the joint structure of PPP and long-run informational market efficiency could not be rejected for all countries. Furthermore, estimation of the error correction terms shows that the black market rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests proposed by Hansen and Johansen [Hansen, H., & Johansen, S. (1993). Recursive estimation in cointegrated VAR-models . Working Paper, University of Copenhagen, Institute of Mathematical Statistics; Econometrics J. 2 (1999) 306] are applied and it is shown that the dimension of the cointegration space is sample dependent while the estimated coefficients do not exhibit instability in recursive estimations.

The monetary model in the presence of I(2) components: long-run relationships, short-run dynamics and forecasting of the Greek drachma

This paper re-examines the long-run properties of the monetary exchange rate model using data for the drachma–dollar and drachma–mark exchange rates under the hypothesis that the system contains variables that are I(2). Using the recent I(2) test by Paruolo (On the determination of integration indices in I(2) systems. J. Economet. 72 (1996) 313–356) to examine the presence of I(2) and I(1) components in a multivariate context we find that the system contains two I(2) variables in both cases and this finding is reconfirmed by the estimated roots of the companion matrix (Do purchasing power parity and uncovered interest rate parity hold in the long-run? An example of likelihood inference in a multivariate time-series model. Juselius, J. Economet. 69 (1995) 211–240). The I(2) component led to the transformation of the estimated model by imposing long-run but not short-run proportionality between domestic and foreign money. Two statistically significant cointegrating vectors were found and, by imposing linear restrictions on each vector as suggested by Johansen and Juselius (Identification of the long-run and the short-run structure: an applicaion to the ISLM model. J. Economet. 63 (1994) 7–36) and Johansen (Identifying restrictions of linear equations with applications to simultaneous equations and cointegration. J. Economet. 69 (1995b) 111–132), the order and rank conditions for identification are satisfied, but the test for overidentifying restrictions was not significant only for the case of the drachma/mark rate. The main findings suggest that we reject the forward-looking version of the monetary model for the drachma/dollar case but not when the drachma/mark rate is used, a result that is attributed to the monetary and exchange rate policy followed by the Greek authorities since Greeces joining of the European Union. Furthermore, we test for parameter stability using the tests developed by Hansen and Johansen (Recursive estimation in cointegrated VAR-models. Working paper (1993) University of Copenhagen) and it is shown that the dimension of the cointegration rank is sample independent while the estimated coefficients do not exhibit instabilities in recursive estimations. Finally, it is shown that the monetary model outperforms the random walk model in an out-of-sample forecasting contest.

The monetary approach to the exchange rate: Long-run relationships, identification and temporal stability*

This paper re-examines the monetary model of exchange rate determination from a long-run perspective using data for three key U.S. dollar bilateral exchange rates. A novel feature of the analysis is the implementation of the testing procedure suggested by Paruolo (1996) to examine for the presence of I(2) and I(1) components in a multivariate context. Furthermore, we consider the cointegration rank utilizing the maximum likelihood cointegration technique proposed by Johansen, 1988 , Johansen, 1991 as well as the estimated roots of the companion matrix ( Juselius 1995 ). Two statistically significant cointegrating vectors were identified and by imposing linear restrictions on each vector as suggested by Johansen and Juselius (1994) the order and rank conditions for identification are satisfied, but all tests for overidentifying restrictions were significant. The main findings suggest that we reject the forward-looking version of the monetary model but the unrestricted monetary model is a valid framework for explaining the long-run movements of these exchange rates. Finally, we test for parameter stability using the tests developed by Hansen and Johansen (1993) and it is shown that the dimension of the cointegration rank may be sample dependent while the estimated coefficients do not exhibit instabilities in recursive estimations.

The monetary approach to the exchange rate: long-run relationships, coefficient restrictions and temporal stability of the Greek drachma

The monetary approach to the exchange rate is examined for four Greek drachma bilateral exchange rates, using data for the recent experience with flexible exchange rates. Four important findings are reported. First, it is demonstrated using the Johansen-Juselius multivariate cointegration technique, that an unrestricted monetary model is a valid framework for analysing the long-run equilibrium relationship of the exchange rate. Second, is found that the proportionality hypothesis of the exchange rate to relative monies is accepted for the four bilateral rates. Third, using some new tests based on recursive analysis proposed by Hansen-Johansen it is found that the dimension of the cointegration space may exhibit sample dependency, but the estimated coefficients do not display instabilities in recursive estimation. Finally, using the residual-based test for the null of cointegration newly developed by Shin, it is shown, that for the case of the drachma-Deutschemark and drachma-franc the null hypothesis is a...

The impact of stock incremental information on the volatility of the Athens stock exchange

In this paper we model the volatility of the Athens Stock Exchange general index. With the use of alternative conditional heteroskedasticity models (Glonsten et al., 1993; Bollerslev, 1986; Zakoian, 1991) we investigate whether stock returns include incremental information when we model index volatility. Whereas empirically much is known about the volatility of the Athens General Index, very little has been done on the impact the stock increments have on the General Index volatility. Our econometric approach relies on the comparison between TARCH and modified GARCH estimation techniques, on a sample of 48 shares included in the Athens General Index, using daily data over the period 1993–2003. After capturing for any possible qualitative effects, such as the cut-off points indicating a “bearish” or “bullish” capital market, the results clearly indicate that the shares include incremental volatility information in their returns.1 1 An earlier version of this paper was presented at the 2nd Meeting of the Hellenic Finance and Accounting Association, as well as at seminars at Athens University of Economics and Business and University of Crete and thanks are due to seminar participants for numerous helpful comments. We also thank without implicating George Kouretas, Dan Busca and Ionut Dumitru for many helpful comments and discussions.

Expectations and the black market premium for foreign currency in Greece

In this paper an attempt is made to provide an understanding of the black market premium. To this end the operation of the parallel or black market for US dollars in Greece during the recent float is investigated. A series of tests is employed in order to examine the role of changes in agents’ expectations about the official exchange rate in determining the black market premium. To test the impact of anticipated and unanticipated shocks to the official exchange rate on the black market premium, the two-step procedure recommended by Barro (1977) and modified by Hoffman et al. (1994) is employed. The main finding of this analysis is that expectations of devaluation cause movements in the black market premium for Greece and this result suggest that portfolio balance models may be appropriate for understanding the behaviour of the black market premium in Greece.

Cointegration and market efficiency: a time series analysis of the Greek drachma

We use multivariate cointegration techniques to examine market efficiency with respect to five bilateral exchange rates of the Greek drachma. The conclusion is that the five exchange rates possess one long-run relationship and that the existence of the cointegration relation is not affected by temporal instability. The market efficiency hypothesis is therefore rejected.

Exchange Rates, Fundamentals, and Nonlinearities: A Review and Some Further Evidence from a Century of Data

Abstract Purpose The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate behavior over the last 40 years. Furthermore, we test the flexible price monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct our analysis employing a sample of 14 advanced economies using annual data spanning the period 1880–2012. Design/methodology/approach The theoretical background of the paper relies on the monetary model to the exchange rate determination. We provide a thorough econometric analysis using a battery of unit root and cointegration testing techniques. We test the price-flexible monetarist version and the sticky-price version of the model using annual data from 1880 to 2012 for a group of industrialized countries. Findings We provide strong evidence of the existence of a nonlinear relationship between exchange rates and fundamentals. Therefore, we model the time-varying nature of this relationship by allowing for Markov regime switches for the exchange rate regimes. Modeling exchange rates within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. These results show that linearity is rejected in favor of an MS-VECM specification which forms statistically an adequate representation of the data. Two regimes are implied by the model; the one of the estimated regimes describes the monetary model whereas the other matches in most cases the constant coefficient model with wrong signs. Furthermore it is shown that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases. Finally, it is shown that fundamentals are not only significant within each regime but are also significant for the switches between the two regimes. Practical implications The results are of interest to practitioners and policy makers since understanding the evolution and determination of exchange rates is of crucial importance. Furthermore, our results are linked to forecasting performance of exchange rate models. Originality/value The present analysis extends previous analyses on exchange rate determination and it provides further support in favor of the monetary model as a long-run framework to understand the evolution of exchange rates.

Black and Official Exchange Rates in Latin America: An Analysis of their Long-Run Dynamics

This paper analyzes the long-run dynamic relationship between black and official exchange rates for four Latin America namely, Argentina, Brazil, Chile and Mexico over the period 1971-1993. We apply Johansens (1992a, 1995, 1997) recent methodology to the joint hypothesis of cointegration rank and the presence of I(2) and I(1) components along with the estimation of the roots of the companion matrix (Juselius, 1995) and we find evidence of one long-run relationship between the black and official exchange rate, for any country. We also show that the long-run proportionality hypothesis between the two exchange rates could not be rejected, which implies the existence of a constant long-run black-market premium, for all cases. When the premium deviates from its long-run value, the black-market rate adjusts to eliminate the deviation and the speed of adjustment is quite large. Further tests suggest that there is weak-form informational inefficiency in the black markets, which may be due, in part, to the transaction costs and the tight administrative controls over foreign currency applied in these Latin American countries. The results have implications for managing exchange-rate risk and for possible arbitrage opportunities in these markets.