1.0Methodology
1.1 Fractional integration
When testing the mean reversion of the actual exchange rate in China, Japan, US and United kingdom, fractional integration is used. The fractional integration process, often known as the I (d) process, is particularly recognized, as illustrated below.
(1 – L) d x t = u t,
Where u t is always an l (0); a process that Is defined, with the application of the spectral function density, the process of covariance stationery, which is generally positive and thus connected with the zero. Thus, it can be a white noise process, in addition to invertible and autoregressive moving average models. However, x t in the preceding format may represent errors in the following form regression model;
Given y t = β T Z t y t is represented as an of real exchange rates (β) is (k direct1) a vector with unknown parameters, Z t is a (k = 1) vector with terms that are deterministic and may contain, for example, an intercept (Z t= 1) or an intercept which has a linear trend which is (Z t)
It thus shows both semi-parametric and parametric methods in the practical task based on the estimation of d on the frequency territory basis. The main difference is that the l(0) mistake referred to as you t is not utilized in the later functional form. In the parametric methods, a small approximation was utilized for a probability function and the created Lagrange process multiplier. Various semi-parametric methods are also used.
Therefore, essential to highlight that assessment of d is necessary to find out the evidence for purchasing power parity. Therefore, when the fractional differential measurable factor d is recognized as less than 1, the reversal least value is given. In addition, the purchasing power parity may be reached in an extended period. The least determinant of d is, however applied to hasten the rate of convergence. Besides, there is r parity no evidence that the value of d that is expected to be equal to or greater than one is purchasing power parity.
An intercept A linear trend No regressors
AR(1) 1.011(0,932, 1.117) 1.357(1.239, 1.532) 1.342(1.253, 1.474)
White noise 1.395(1,234, 1.211) 1.044(0.884, 1.264) 1.045(0.632, 1.254)
Bloomfield (1) 0.991(0.854, 1.371) 1.122(1.004, 1.333) 1.122(1.008, 1.289)
Monthly AR (1) 0.997(0.873, 1.114) 1.286(1.190, 1.473) 1.275(1.163, 1.432)
Numbers in the frequency domain are the Whittle estimates for d. Parenthesis values relate to the CIs of the Robinson (1994) test values0f d. The chosen specifications are displayed in bold.
1.2 Empirical findings
First pit examination on the model given by the following two equations having z t = (1, t) T, that is,
y t = α + βt + x t; (1-L) d x t = u t, t = 1, 2…,
When α and β are the intercept-corresponding coefficients, and the linear time trend and x t are the regression errors that must be I(d), where d may be the true value. Initially, it is used to assume that u t is the white noise technique, but other types of weak autocorrelations are also considered. In particular, AR (1), Bloomfield, and seasonal difficulties are examined monthly AR (1). The higher orders of A.R. were also used, and the outcomes were similar as for A.R. cases (1). The Bloomfield model is one of the non-parametric approaches that give the autocorrelations that fade exponentially as in the A.R. situation and match extremely well with the Gilboa & Mitchell (2020) test used here.
The table above shows the findings of the Whittle estimate of d together with 95% C.I.s of the Gilboa & Mitchell (2020) non-rejection data, for three standard instances studied in the literature, the cases of no regressor of indifference regression, as stated above. (i.e. α = β = 0 a priori), intercept instance (α unknown and β = 0 a priori) and intercept linear in trend (α and β unknown) intercept. It displays the findings for the four previously stated kinds of disruptions.
The first characteristic in this table is that, save for two instances, d data are typically greater than 1, with two exceptions, monthly and Bloomfield AR disturbances without regressors. Furthermore, in these two instances, the root of the unit and the null hypothesis cannot be dismissed at 5%. According to the findings, then, the notion of buying power parity for China is refuted.
Searches carried out on various tests of the specification to recognize the appropriate specification for the series, and the model has an intercept. Seasonal AR (1) disturbance appears to be the relevant model in the light of the values for terms deterministic and different L.R. tests. In other words,
Log RER t = -0.2593 + x t ; (1-L) 1.286 x t = u t ; u t = 0.576u t – 12 + E t , (-52.74)
Where t data are typically in parentheses, the growth rate series nevertheless indicates a commodity with a long memory characteristic (with an integration order of about 0.286).
The semi-parametric method is used to estimate d to verify the findings above, according to Gilboa & Mitchell (2020). It is typically an estimate of the local Whittle on the frequency field, taking account of the band frequencies that reach zero. If it has a semi-parametric nature, some error term specifications do not apply even if certain estimates will rely on the number of bandwidths.
The estimations based on the method previously stated are presented in Figure 1. In addition to the estimates of the bandwidth parameter (shown in the figure’s horizontal axis), the confidence band 95 percent representing to I (1) hypothesis is given. They have observed that the bandwidth figures and the estimations are typically within or above the I (1) interval and more than once indicate that the purchasing power parity assumption is not completely met.
In the next sections of these investigations, d stability throughout the whole period sample is typically determined. This is the important problem which notes that although the purchasing power parity seems unsatisfactory for the whole period sample, it can also be true for a specific subsample. The break in the information may still create biases in the findings of the estimate.
Figure 1. Small semi-parametric d estimates (Robinson, 1995). The horizontal axis means the bandwidth parameter, while the vertical axis shows the estimated value of d.
The first thing that was carried out was to reestimate the fractional differential variables of d for various samples of different observations, each representing to give different full years of information, beginning with the period sample and in the future with an observer in a moment to the last period sample. In all the instances, it may be assumed that the interest model is the I(d) intercept technique with seasonal AR(1) disorders.
Figure 2 illustrates that the d estimates are largely high (1,62), beginning with the first five years of observation. Although they begin to reduce as they go on into the sample, statistically significant stays higher than one until two years later. The estimates are usually inside the root interval unit from the sub-sample of February 1996 through to January 2001 through to January 2004 through December 2008 and, in most cases, with lower values in the unit and, finally, from the last sub-sample up to the latter, also statistically exceed one with the data approximately 1.2.
Figure 3 provides d estimates using the same method, but this time with a subsample of about 120 observations over n ten years. It is realized here that for the ten points, which are first estimates representing the subsample from January 1994 to December 2003 to October 2004 – September 2004, d data are typically more than one where the unit root is denied for top integration orders. Thus, estimates are typically below one, and the root of the unit is always nil and cannot be rejected for sub-samples from November 1994- October 2004 to February 2000-January 2009). Eleven estimations from March 2000 – February 2009 to December 2000 – November 2010 have a little higher current value than 1, and the zero root unit has also been denied. Therefore, the integration grade in the series around the center of the sample appears to be somewhat reduced, and mean reversal does not occur. Therefore the buy power parity hypothesis is not fulfilled.
In the last section of the text, they question the non-stop sources and the greater degree of reliance realized in the real exchange rate. For this reason, they could estimate d for three distinct components of the actual exchange rate, which is the normal exchange rate and the U.S., Japan, the U.K., and China prices.
In Figure 2, the recursive estimate of d for China, using a five-year sample duration between 1994 and 1998, was somewhat higher and progressively decreased until the last year, about 1.8 from 2014 to 2018. D estimates for the United States increased progressively throughout the five years assessed. Consequently, the United Kingdom’s dose estimates steadily increased throughout the years. Finally, Japan’s estimations have also increased significantly throughout the years. The nations are thus satisfied that there is not much movement in the exchange rates.
In figure 3, the recursive d estimates were made using a 10-year sample, with China’s no significant difference but progressively decreasing over the years. The United States grew significantly throughout the years until the last projected the year of 2013. As a result, the United Kingdom’s dose estimates have likewise steadily increased over the years. Finally, the Japanese estimations were likewise rising progressively throughout the years up to the latter projected year.

Figure 2. Recursive estimates of d using samples period for full five years.

Figure 3. Recursive estimates of d using samples period for whole ten years.
1.3 Discussion
The early statistical examination indicates primarily that China’s long-term purchasing power parity theory does not hold. This outcome is consistent with the earliest analyses of China’s actual exchange rate. One of the primary reasons is China’s post-1994 exchange system, which is still largely dependent on government supervision, although considerable improvement has previously been achieved. Government intervention in the exchange system may alter the buying power parity and eventually breach the premise of buying power parity.
When you look at the recursive estimates of d for the full size of the sample period of five to ten years, at the beginning of the investigated period, you can see a visible structural change, which has always been in line with the truth that the rate of exchange has changed from the last centrally designed to that of the other with a market orientation. After the modification of the year 1994, there is no larger change to the recidivist estimates, particularly when the longer sample periods of about ten years are taken into account, as in Figure 3. Thus, there are no major changes in Chinese exchange rate systems after the changing of the Chinese rate of exchange regime on 21 July 2005, which guarantees that the findings acquired in earlier research, such as Zafar & Alzoub, were achieved.
China’s purchasing power parity was \$24,142,83 billion in gross domestic product based on PPP in 2019. According to the PPP for China, the GDP grew from \$4.054.23 billion international dollars in 2001 to \$24.142.83 billion international dollars in 2020, having an average growth rate of about 9.92%.

America’s buying power parity is somewhat lower than China’s. In 2020, U.S. gross domestic product was about \$20.932.75 billion, depending on the parity of buying power. In 2020, GDP based on the US PPP grew from US\$10 581,83 million to \$20 932,75 billion in 2019, which is higher at a pace of about 3,68 percent. The parity in buying power is used to translate the gross domestic product into foreign currencies.
In 2020, Japan’s purchasing power parity Gross Domestic Product was at about US\$5.313.02 billion. Japan’s GDP based on the PPP rose from 3.570.37 billion dollars in 2001 to about 5.313.02 billion dollars, a rise of roughly 2.15 percent on average.
In the United Kingdom, the gross domestic per capita in 2020 was determined to be US\$ 41,627.13 after the purchasing power parity had been corrected. When adjusted with the purchasing power parity, GDP in the U.K. is equivalent to 234 percent of the global average.
2.0 Panel SURKSS Test
With the use of the Panel SURKSS test, purchasing power parity may be utilized to establish the exchange rate balance for China, the United States, the United Kingdom, and Japan. As mentioned previously, Joghee et al. (2020), SURADF panel, and the Jabbie and Jackson (2020) nonlinear unit test are always mixtures that are KSS tests according to the panel estimate technique for SURs. The test was originally performed by Gilboa & Mitchell (2020) and ultimately proven strong in the investigations. Gilboa & Mitchell (2020) reports that this kind of nonlinear unit-root test is higher Joghee et al. (2020) when more nonlinear data generation. Conversely, for the unit root panel-based test usually, a joint test for all the panel members of a certain unit root and not able to determine the I (0) or I (1) series mix which is in the panel configuration, the panel SURKSS tests contain an inquiry that seeks to separate the root null hypothesis for every panel individual. This allows them to determine how many and the kind of series in the Panel are usually stationary.
Test of KSS typically is based, by Gilboa and Mitchell (2020), on identifying the existence of the non-stationary versus the nonlinear but essentially stationary autoregressive smooth transition (STAR) process. This model is supplied by
∆X t = y X t-1 {1 – exp (-θ X 2t-1)} + v t, (1)
Where X t is an interesting data series, v t is typically an i.d. error with constant variance and an oscillation error 0, which is the ESTAR model’s transition variables and administers transition speed. In addition, the linear process unit root is preceded by the null hypothesis X t, while the nonlinear stationary ESTAR process is preceded by X t. One of the weaknesses of this kind of technique is that the y measurement is not always recognized below the zero hypotheses. The Taylor First Order Approximation series was used by Gilboa and Mitchell (2020) for {1 – exp (- T-1)} below the Null hypothesis = 0 and hence the approximate equation one below by applying the auxiliary regressions: Gilboa & Mitchell (2020) has shown clearly that the application of lag structure that is identical on the individuals of the Panel may prejudice the statistics of the test; thus they must choose the delay structures of each equation based on the Jabbie & Jackson method; (2020). Gilboa & Mitchell (2020) have shown that this attempt has a non-standard distribution and that critical values must be simulated.
∆X t = ℥ + ƍ X 3t-1 + Ʃ k bi ∆X t-I + t=1,2…. T
In this context, null hypotheses together with the alternate hypotheses are often μ = 0 (non-stationarity) versus μ < 0 (nonlinear ESTAR stationarity).
2.1 Empirical findings
In contrast, different unit root univariate and the panel unit root test are first used to study the null of a particular unit root in the actual bilateral rates of exchange for China, the USA, the U.K., and Japan. Both the first and second generations of the root test panel are utilized in the research. Based on the figures in Table 2, it is clear that the three univariate root tests of ADF, Perron, and Philips, and Joghee, etc. (2020, KPSS) do not, for China, the U.S., United Kingdom, and Japan reject zero the non-stationary, actual exchange rate. This finding is generally compatible with the outcomes of previous research and is mostly persistent due to the low power of the three single unit root tests. This finding indicates that the parity of buying power throughout the study time for the four nations does not hold. The reason for the inability to reject the unit-root hypothesis is due to the current misguided argument that the actual process of the exchange process is most probably nonlinear because of the costs of transactions; thus, in this kind of scenario, the power of the three tests is typically low.
Moreover, as everyone knows, the univariate root test may have poor power when applied to a limited sample. In this kind of scenario, however, a unit test on a panel is primarily the higher aid provided it provides an allowance for a rise in order power for the analysis of integration by giving a cross-section allowance and the temporal dimensions to be utilized concurrently. The findings for first-generation and the second generation test panel units are shown in Tables 3 and 4. The three Panel based root tests, I'm-Pesaran-Shin, MW, and Hadri, are all non-stationary in China, the USA, Japan, and the United Kingdom. All of them exhibit the same conclusion with actual exchange rates. The more severe disadvantage of the root test method is based on the first-generation Panel. Joghee et al. (2020) note that failing to consider the contemporary correlation of information would prejudice the root test based on the Panel to reject the jointed unit root hypothesis. Dependencies of the cross-section are known for the root test in the panel unit of the second generation. These techniques are thus a better procedure to examine the long-term dynamics of RER. Our research includes both the covariance restriction model and the error component model. Table 3 displays the outcomes of the two tests of unit roots based on the second generation panels.
The findings likewise indicate that real exchange rates are all non-stationary in the four nations listed. Our results show that the actual exchange rate is typically a random process. The panel root test based is, as previously learned, a fixed test of the unit root for all panel individuals, and the mixture of I (0) and I(1) series in the settings of a panel cannot always be determined; the panel SURKSS test reveals a different unit-root hypothesis for every individual of Panel. This allows you to easily see how many series are typically stationary processes in the Panel. Joghee et al., (2020) Panel SURKSS test result indicates that the RER for the two different bilateral RER between the four nations is stationary. They are both U.S. and China, as indicated in Table 4. These findings demonstrate that the two nations' actual exchange rates are not linear and the purchasing power parity only applies to those two countries. These are also included in Table 4.
Model Test statistic P* value
Choi (2002) 1.212234 0.669965
Chang (2002) 1.003123 0.633245
Table 3. second-generation panel-based unit root test: In (real exchange rate)
Country SOURCES Critical values
1% 5% 10%
China 0.2263 -2.6543 -1.4322 -1.3433
United States 1.4443 -2.8754 -2.0986 -0.3232
United Kingdom 0.4333 -2.9877 -1.2345 -1.2345
Japan 0.5422 -2.4353 -1.7533 -1.5674
Table 4. results of nonlinear unit root test
Data and empirical analysis
This section examines the PPP for China, the U.S., the U.K., and Japan. The exchange of the Yuan was exclusively utilized for the U.S. currency until mid-2005. On the other hand, the United Kingdom used up-to-date usage of the Pound sterling, and Japan utilized the Japanese yen. Since then, China has been employing a floating exchange rate management method. To evaluate the purchasing power parity under various schemes, the analysis is divided into two distinct periods; Set 2000: 1-2005 month: M7 and operated: 2005 M8-2020m2.
The nominal United States Dollars and the Yuan exchange rate are primarily from the CHRUSD series from the electronic supply data system St. Louis FED. BER generally recognizes the actual bilateral Yuan/U.S. dollars exchange series. BER is the average weight of bilateral exchange rates modified according to the prices of the consumer. The pattern of weighting typically varies overweights and time are often based on commerce between 2002 and 2020. To study the stationary characteristics of the BER series, conventional root tests are applied, including ADF, KPSS, P.P., and ultimately Ng-Peron tests and the root tests with the structure of interruptions, including the one brake tests for Zivot-Andrews and the other two brake tests for Lee and Stazicich.
As a result, commerce among the U.S., the U.K., China, and Japan has grown significantly in the last 30 years. In comparison with the other three nations, China has been discovered to have a lot more exports. The findings clearly show that China and other Japanese, United Kingdom, and U.S. nations' controlled float has led to a major divergence from the exchange-rate path towards purchasing power. China, the USA, the U.K., and Japan must reinstall the method for the fixed exchange so that they may recover control over the conduct of monetary policy.
The real exchange rate (RER) may be stated easily using the following Equation 1:
RER= EP*/ P
Where E is a standard rate of exchange (weighed as the price of the domestic currency of the foreign currency), p* is referred to as the international price level index. Lastly, P refers to the domestic price level index.
Therefore, if the logarithms are denoted by the lower case letters, they may construct an equation 2:
r = e+ p – p*
u r n refers to the logarithmic form with actual exchange rates and 'p*' and 'p,' referring to domestic logarithms and foreign index prices.
The validity of a long-term buying power parity requires stable rates of exchange. Therefore, if r is known to be stationary, a departure from the purchasing power parity may be transient and vanish with time. So purchasing power parity will most probably persist over the long term. On the other hand, if "r" has the unit root, it will imply that differences from parity may be cumulative but ultimately not self-reversed.
The research aims to investigate the stable characteristics of China, the United States, Japan, and the United Kingdom's current bilateral exchange rate of utilizing both traditional root testing and structural break tests for the root unit. To investigate the stationary characteristics of the RER series, the traditional root test units, which include ADF, pp, KPSS, Ng-Perron tests, and the final root testing of the unit with the structure of breaks, including Zivot-Andrews tests, are required.
The empirical work based on information from the time series presupposes that time series can be stationary. The stochastic process is known to be stationary in its width and mean over a lengthy period. The covariance existing between the two different periods matters a lot with the distance or a lag or a gap between the two time periods, not the moment at which covariance can be measured. The stationary series displays the mean reversal such that the mean reversal may fluctuate over a permanent mean that is long-term. Thus it has a limited variance that can be time-invariant. Conversely, a series that is non-stateful does not have a long-term signification to which the series may come back. Thus the variance is typically time-dependent and tends towards infinity as time nears infinity.
The frequently used root tests in empirical research for conventional units are ADP, P.P., and, ultimately, KPSS. Furthermore, the ADF, P.P., and KPSS tests have significant drawbacks and can result in an erroneous finding.
Four-unit root test statistics have been developed, typically utilizing GLS data which are de-trended for certain time difference variables to cope with the limitation of P.P. and ADF unit tests root. The Philips Perron (P.P.) and Dickey-Fuller (D.F.) mainly applied test units with excellent size and power characteristics.
The main critique of purchase power parity testing is typically centered on the traditional root test deficiency, which is usually considered the short shocks that do not have a long-term result on the data. It is also well knowledge that interruptions and outliers in the variable can reduce the unit root test power and result in over-acceptance of the hypothesis of a unit root. One method of addressing the closure of the traditional root test unit is to use the root test unit with the structural disruptions of the RER. They use a Zivot-Andrews one-break test and a Strazicich and Lee two-brake test for the presence of the roots of the units and the sequence of integration of the data.
Three alternative models A, B, and C are examined for the equations of the unit root test. The null unit-roots hypothesis for the models typically is identical to that demonstrated in Equation 3:
H0 : Y t = ư + Y t-1 + et
Where D.U. T (μm) are regarded as a dummy variable, showing a constant rupture with D.U. T (α) = 1 if t reversing T. μ is I, 0 or otherwise; D.T. *t (α) is a dummy variable and represents a rupture of the trend, and D.T. *t (μm2) = T. μ if t is reversing T. т, while 0 on the other hand. T B, therefore, represents temporal interruptions, and μ = T B/T portrays the moment of interruption.
In Andrews and Zivot, the most significant values are completely different from the essential value in Perron. The distinction is generated because the break selection is normally regarded as a consequence of an estimate process rather than as an exogenously fixed one. According to the Zivot-Andrew test, the zero hypotheses depict a root unit in the queue. Suppose the variable computer t statistics are larger than the critical values that are in level forms. In that case, they deny the unit root null hypothesis and thus declare the data to be stationary. Moreover, they cannot deny the null unit root hypothesis.
Some of the models allow for the two breaks, both alternatively and null, which is endogenous. They show that statistics for the two-break L.M. root test unit are calculated by the L.M. test, which cannot spuriously reject a root unit null.
In contrast to Andrews and Zivot, model A and model B are used in the Lee-Strazicich tests. For the Lee-Strazicich test, Model A depicts two stable fractures and is illustrated in Equation 4 below.
Y t = ƍ 1 Zt + e t, e t = β e t-1 + Ɛ t
Z t = (1,t, D 1t, D 2t))
Where Z t is the exogenous vector, and T Bj is the date of break. J= 1, 2,… J= 1. When t is inversely proportional to T Bj Dj = 1 and 0 otherwise.
Model C demonstrates the two constant trends, and the breaks are seen in equation 5;
Y t = ƍ 1 Z t + e t, e t = β e t-1 + Ɛ t
Z t = (1, t, D 1t, D 2t, DT 1t, DT 2t)
In the equation 8, J=1,2 when t is inverse to T Bj + 1 DT JT = t or 0 otherwise. The Lee-Strazicich calculates the crucial values.
According to the test findings, if the computer statistics of t of the variable are higher than the critical values in their levels, the root unit hypothesis with a broken structure is to be denied. Thus the variables are stationary in trend. Otherwise, they cannot deny the null hypothesis of a structural break from the unit root.
In conclusion, the findings indicated that floating between Japan and the U.S. dollar created a larger divergence from the exchange rate's purchasing power parity route. The buying power parity is more likely to be lower in open economies. There is thus a shopping power parity between Japan and the United States in which the Japanese yen may be exchanged for U.S. international dollars. Therefore, there is a shopping power parity between the U.K. and the U.S. since the Pound sterling may be exchanged into U.S. foreign dollars. Britain must reinstall the fixed exchange system to reinstall its monetary policy control. Finally, there is also a parity of buying power between China and the United States in which the Yuan may be exchanged into international U.S. dollars.

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