Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152959
Authors: 
Abadir, Karim
Talmain, Gabriel
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 525
Abstract: 
We provide a methodology to disentangle the long-run relation between variables from their own dynamics. Macroeconomic and aggregate financial series have a high degree of inertia. If this persistence is not properly accounted for, spurious correlations will give rise to paradoxes. Our procedure shows that the Uncovered Interest Parity (UIP) puzzle evaporates when the dynamics are properly modelled: the forward premium loses all the predictive power that it seemed to have. We also show how the stock market grows in long cycles around a trend given by GDP, in a stable relation that does not break.
Subjects: 
ACF-based GLS procedure
Autocorrelation Function
long memory
Nonlinearities
Uncovered Interest Parity anomaly
JEL: 
E37
Document Type: 
Working Paper

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