The Misalignment Phenomena in the Foreign Exchange Market: Evidence for the Tunisian Dinar

Abstract

The aim of this chapter is to assess the real exchange rate misalignments. A smooth transition autoregressive model (STAR) is used for Tunisian exchange market. This model allows us to see whether these differences are temporary or persistent over the period 1975–2012. We start by defining the exchange rate’s fundamental determinants to provide the equilibrium exchange rate value. Then, we study the observed exchange rate adjustment toward its equilibrium level. Vector autoregressive model and vector error correction model are applied to characterize the joint dynamics of variables in the long run. The results indicate a long-run relationship between variables. In order to consider the nonlinearity for better results, we will move to nonlinear smooth transition model. We found there is a high degree of exchange rate misalignment. We recognized that this difference decreases in the long run and disappears at the end.

Citation

Ezzeddine, S.B. and Naoui, K. (2016), "The Misalignment Phenomena in the Foreign Exchange Market: Evidence for the Tunisian Dinar", The Spread of Financial Sophistication through Emerging Markets Worldwide (Research in Finance, Vol. 32), Emerald Group Publishing Limited, Leeds, pp. 345-360. https://doi.org/10.1108/S0196-382120160000032015