Predictability in real exchange rates: Evidence from parametric hazard models

Abstract

This study uses parametric hazard models to investigate the cyclical behavior of several real exchange rates over the January 1974 through December 1992 period. Evidence of cointegration among the real rates indicates that movement toward a stochastic trend occurs and that deviations from long-run alignment or parity are eliminated over time. The results show, however, that real exchange rate cycles do not exhibit duration dependence. The implication of this finding is that real rates do not tend to fixed cycle lenghts and that predictable periodicity is not present. Thus, while deviations in real exchange rates from long-run alignment are eliminated, the movement toward parity is unpredictable. Additionally, no evidence is obtained that trends in mean cycle duration exist. The mean length of real rate cycles appears not to have changed over the recent floating rate period, a finding consistent with a constant level of volatility in the exchange markets. Finally, the results reveal that successive cycle dependence does not exist, that is, the duration of a cycle is not dependent on the length of the prior cycle.