Article ID Journal Published Year Pages File Type
958210 Journal of Economics and Business 2010 19 Pages PDF
Abstract

The aim of this paper is to investigate whether the Euro–US dollar exchange rate cointegrates with other major exchange rates since the introduction of the Euro. In order to evaluate whether the introduction of a new currency, which has commonly replaced more and less established currencies, has generated common stochastic trends which are possibly linked to cross-inefficient markets, the results are compared with those of a cointegration analysis of the pre-Euro era.We can show that after the introduction of the Euro two cointegration relationships arise among the Euro–US dollar and the four most important exchange rates, whereas the no-arbitrage condition is satisfied. Here, we discovered a new result: free floating exchange rates are cointegrated after the introduction of the Euro. The Euro–US dollar exchange rate cointegrates with the Australian dollar–US dollar and with the British pound–US dollar. In both cases the Euro–US dollar is weakly exogenous. The results coincide with comovements of important fundamentals which imply cross-market efficiency.

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