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Short-run forecasting of the euro-dollar exchange rate with economic fundamentals

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  • Dal Bianco, Marcos
  • Camacho, Maximo
  • Perez Quiros, Gabriel

Abstract

We 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 Info

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

Volume (Year): 31 (2012)
Issue (Month): 2 ()
Pages: 377-396

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:2:p:377-396

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

Related research

Keywords: Euro-dollar rate; Exchange rate forecasting; State-space model; Mixed frequencies;

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  1. Angel de la Fuente & José E. Boscá, 2011. "Gasto educativo por regiones y niveles en 2005," 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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