Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?

Hsiu Hsin Ko; Masao Ogaki

doi:10.1016/j.iref.2015.02.016

Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?

Hsiu Hsin Ko, Masao Ogaki

Faculty of Economics

Research output: Contribution to journal › Article › peer-review

11 Citations (Scopus)

Abstract

We use a residual-based bootstrap method to re-examine the finding of the Granger causality relation from exchange rates to fundamentals in Engel and West (2005), in which the relation is taken as evidence for their explanation for the present-value model for exchange rates. Our test results are against the previous findings. The Monte Carlo experiment results suggest that the previous evidence for the causality relation from exchange rates to fundamentals is very likely caused by the size distortion. Hence, the existing Granger causality evidence is not strong enough to validate the new explanation for the present-value model.

Original language	English
Pages (from-to)	198-206
Number of pages	9
Journal	International Review of Economics and Finance
Volume	38
DOIs	https://doi.org/10.1016/j.iref.2015.02.016
Publication status	Published - 2015 Jul 1

Keywords

Bootstrap test
Exchange rates
Fundamentals
Granger causality

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.iref.2015.02.016

Cite this

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title = "Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?",

abstract = "We use a residual-based bootstrap method to re-examine the finding of the Granger causality relation from exchange rates to fundamentals in Engel and West (2005), in which the relation is taken as evidence for their explanation for the present-value model for exchange rates. Our test results are against the previous findings. The Monte Carlo experiment results suggest that the previous evidence for the causality relation from exchange rates to fundamentals is very likely caused by the size distortion. Hence, the existing Granger causality evidence is not strong enough to validate the new explanation for the present-value model.",

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T2 - What does the bootstrap test show us?

AU - Ko, Hsiu Hsin

AU - Ogaki, Masao

N1 - Funding Information: The authors thank Carl R. Chen (the editor), the referees, the Ohio State University, and in particular, Paul Evans, Pok-Sang Lam for useful comments and suggestions. Ogaki's research was partially supported by JSPS KAKENHI 25285063 . Publisher Copyright: © 2015 Elsevier Inc.

PY - 2015/7/1

Y1 - 2015/7/1

N2 - We use a residual-based bootstrap method to re-examine the finding of the Granger causality relation from exchange rates to fundamentals in Engel and West (2005), in which the relation is taken as evidence for their explanation for the present-value model for exchange rates. Our test results are against the previous findings. The Monte Carlo experiment results suggest that the previous evidence for the causality relation from exchange rates to fundamentals is very likely caused by the size distortion. Hence, the existing Granger causality evidence is not strong enough to validate the new explanation for the present-value model.

AB - We use a residual-based bootstrap method to re-examine the finding of the Granger causality relation from exchange rates to fundamentals in Engel and West (2005), in which the relation is taken as evidence for their explanation for the present-value model for exchange rates. Our test results are against the previous findings. The Monte Carlo experiment results suggest that the previous evidence for the causality relation from exchange rates to fundamentals is very likely caused by the size distortion. Hence, the existing Granger causality evidence is not strong enough to validate the new explanation for the present-value model.

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KW - Exchange rates

KW - Fundamentals

KW - Granger causality

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Granger causality from exchange rates to fundamentals: What does the bootstrap test show us?

Abstract

Keywords

ASJC Scopus subject areas

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