Re‐examining Cointegration, Unit Roots and Efficiency in Foreign Exchange Rates

Abstract

This paper examines the cointegrating relationships in seven foreign exchange rates for a sample period from 1974 to 1991 by utilizing Johansen's (1991) method. Three subperiods are also examined to confirm the intertemporal stability of the test results. In addition, subgroups of the seven exchange rates are analyzed to determine the consistency of the empirical results with respect to different dimensions in the system. We find that the test results are sensitive to the choice of test statistics, time trends, subperiods as well as subgroups. All results indicate either one or no cointegrating relationship exists. Further, we study time series properties of twenty one cross‐currency rates and the corresponding exchange rates in terms of a common currency. None of cross‐currency rates are stationary and hence the pairs of exchange rates are not cointegrated.

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