Temporal aggregation and unit roots in nominal foreign exchange rates

Abstract

Extant empirical evidence on the logarithm of the daily and weekly spot exchange rates indicates the presence of unit roots. At a lower frequency, however, there is evidence that monthly spot rates do not have a unit root, although the autocorrelation coefficient may be close to one in absolute value. Unlike earlier studies, the present article applies various tests to data with different frequencies and reports evidence suggesting that exchange rates may not have unit roots. Absence of nonstationarity in the observations implies that econometric models may not have to apply any differencing.