Updating Bilson 's (1984) investment strategy using an out-of-sample forecast procedure, we find much smaller profits from a trading strategy based on purchasing power parity. Though the total profit is significant at a 5 percent level, it is substantially lower than what Bilson found. Our results suggest Bilson's excess profits are due to the sample of data used and the in-sample nature of the tests. Hence, this paper demonstrates that the simple investment strategy leads to the same conclusion that econometric testing does; namely, that purchasing power parity is only marginally useful in forecasting exchange rates.
Copyright © 1998 University of Nebraska-Lincoln. This article first appeared in Quarterly Journal of Business and Economics 37, no. 2 (Spring 1998): 49-62.
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Norrbin, Stefan C., and C. Mitchell Conover. "How Much Is Purchasing Power Parity Worth?" Quarterly Journal of Business and Economics 37, no. 2 (Spring 1998): 49-62.