| Summary: | The first essay of the thesis investigates currency misalignments and their magnitude for the Chinese yuan (CNY), the Japanese yen (JPY) and the British pound (GBP). We employ the model-based exchange market pressure. Conversion factors required to estimate the pressure on the currency are computed using a time-varying coefficient regression. We found persistent and significant undervaluation of CNY. For the JPY, the currency pressure shows predominantly low values with occasional high pressure in both directions. And finally, the results indicate very low pressure on the GBP. At the intuitive level, the outcome of the GBP suggests that there exist more effective leverages to influence the exchange rate rather than bold interventions in the exchange market. Many empirical studies on forward rates showed that the spot difference and forward premium are negatively related. However, this violates the forward rate unbiasedness theory. Possible explanation of the forward premium puzzle is due to the non-linearities in the series and misspecification. In the second essay we employed a time-varying coefficient technique as an alternative to the standard regression. This methodology estimates bias-free coefficients and thus should provide better estimates of the link between spot and forward rates. The findings of this essay strongly support the forward rate unbiasedness hypothesis. In addition, our results do not violate the efficient market theory. The final essay of the thesis investigates symmetry and proportionality conditions of PPP in nine EU countries using generalised cointegration techniques. Total effect and true (bias-free) effect coefficients of PPP are analysed. The outcome of the total effect coefficients demonstrated that the exchange rate is inversely related to the prices for some of the countries. Surprisingly, the movement of the monthly estimates of the total effect are symmetrical; however, this symmetry is not as usually thought but the movement of the coefficients are symmetrical. We could possibly conjecture that the coefficients of total effect could be not definable. We also made an attempt to remove biases from the total effect coefficients in order to find strict proportionality and consequently cointegratedness of the true values. The results show that the averages of the true coefficients satisfy both the strict proportionality and symmetry conditions. However, monthly bias-free coefficients significantly deviate from unity leading to the rejection of PPP in the short run. Therefore, our result can be interpreted as in favour of the long run PPP while in the short run it is violated.
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