Causal relationship testing with applications to exchange rates

Authors:
T. J. Brailsford;Jack Penm;R. D. Terrell
Affiliations:
UQ Business School, University of Queensland, Brisbane, Australia.;School of Finance and Applied Statistics, The Australian National University, Canberra, Australia.;National Graduate School of Management, The Australian National University, Canberra, Australia
Venue:
International Journal of Electronic Finance
Year:
2008

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Abstract

This paper undertakes two causality studies with exchange rate applications in a framework of Zero-Non-Zero (ZNZ) patterned Vector Error-Correction Modelling (VECM). The first study shows that money supply is a source of financial and economic influence on the Euro. The second gives evidence of support for Purchasing Power Parity (PPP) using monthly data between Japan and the USA. The results indicate that high-frequency finance data can reveal the existence of long-term PPP. This evidence sheds light on the adjustment mechanisms through which PPP is achieved. Also, the proposed ZNZ patterned VECM modelling allows better insights from this kind of financial time-series analysis.