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Forecasting the Yen/U.S. Dollar exchange rate: Empirical evidence from a capital enhanced relative PPP-based model

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Author Info

  • Grossmann, Axel
  • Simpson, Marc W.

Abstract

This study uses a relative purchasing power parity (PPP) model based on price indexes (consumer, CPI or traded-goods price indexes, TPI), interest rate differentials, and a linear forecasting technique to determine the horizon over which such a model outperforms a random walk in forecasting the Yen/U.S. Dollar exchange rates out-of-sample. The results improve if one adjusts a simple CPI-based PPP-model by interest rate differentials, while the best results are obtained using a TPI-based PPP-model. For example, the TPI-based model, adjusted by interest rate differentials, is able to statistically significantly outperform the pure random walk starting at forecast horizons of 1 month.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 21 (2010)
Issue (Month): 5 (October)
Pages: 476-484

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Handle: RePEc:eee:asieco:v:21:y:2010:i:5:p:476-484

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Web page: http://www.elsevier.com/locate/asieco

Related research

Keywords: Yen/dollar exchange rate Relative purchasing power parity Interest rate differentials Forecasting Short-term horizons;

References

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