Predicting foreign exchange movements using historic deviations from PPP
AbstractThe ability to forecast FX rates from historical exchange rate movements is examined. An eight nation study shows a currency's deviation from the rate predicted by PPP over a four year period can predict the direction of its movement in the subsequent one to four years. We show short term exchange rate movements of freely floating currencies are large in comparison with changes in economic fundamentals and these movements accumulate to create pressure which results in a predictable pattern of reversal. The results are robust across currencies and relatively insensitive to the time parameters used in the estimation.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Economics & Finance.
Volume (Year): 20 (2011)
Issue (Month): 4 (October)
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Web page: http://www.elsevier.com/locate/inca/620165
Purchasing power parity Currency Exchange rate Foreign exchange;
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