Deviations and mean reversion to purchasing power parity in the Asian currency crisis of 1997

This study analyses the process of mean reversion towards purchasing power parity (PPP) for a sample of Asian countries around the 1997 crisis. It is found that appreciation relative to PPP is evident prior to the 1997 crash period. Correction occurs from 1997 onwards, a period marked by extreme mov ements in exchange rates with both appreciation and depreciation relative t o the PPP rate over relatively short periods. The key result of this paper is that although reversion towards PPP is apparent for mean, though not sta tistically significant, it is clear that there is a substantial, statistica lly significant change in variance from 1997 onwards. This result has impli cations both for economic modelling of crash periods and for appropriate ch oice of statistical tests.