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Investing under model uncertainty: Decision based evaluation of exchange rate forecasts in the US, UK and Japan

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  • Garratt, Anthony
  • Lee, Kevin

Abstract

We evaluate the forecast performance of a range of theory-based and atheoretical models explaining exchange rates in the US, UK and Japan. A decision-making environment is fully described for an investor who optimally allocates portfolio shares to domestic and foreign assets. Methods necessary to compute and use forecasts in this context are proposed, including the means of combining density forecasts to deal with model uncertainty. An out-of-sample forecast evaluation exercise is described using both statistical criteria and decision-based criteria. The theory-based models are found to perform relatively well when their forecasts are judged by their economic value.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 3 (April)
Pages: 403-422

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:3:p:403-422

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Exchange rates Investment strategies Forecast evaluation Model averaging;

References

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Cited by:
  1. Anthony Garratt & Kevin Lee & Kalvinder Shields, 2014. "Forecasting Global Recessions in a GVAR Model of Actual and Expected Output in the G7," Discussion Papers 2014/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).

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