Short-run forecasting of the euro-dollar exchange rate with economic fundamentals
AbstractWe propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one-week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random-walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model obtains a great improvement when we use the direction of change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down, with statistically significant improvements.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 31 (2012)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/inca/30443
Euro-dollar rate; Exchange rate forecasting; State-space model; Mixed frequencies;
Other versions of this item:
- Marcos dal Bianco & Maximo Camacho & Gabriel Perez-Quiros, 2012. "Short-run forecasting of the euro-dollar exchange rate with economic fundamentals," Working Papers 1201, BBVA Bank, Economic Research Department.
- Marcos dal Bianco & Maximo Camacho & Gabriel Perez-Quiros, 2012. "Short-run forecasting of the euro-dollar exchange rate with economic fundamentals," Banco de EspaÃÂ±a Working Papers 1203, Banco de EspaÃ±a.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
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- Angel de la Fuente & José E. Boscá, 2011.
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UFAE and IAE Working Papers
873.11, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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