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Alternative Long-Horizon Exchange-Rate Predictors

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  • Chen, Jian
  • Mark, Nelson C

Abstract

This paper employs quarterly observations on US dollar prices of the pound, Deutschmark, Swiss franc, and yen from 1973,2 to 1994,4 to sort out three broad issues raised by recent work showing that economic fundamentals have predictive power for exchange rates at long horizons. Three alternative fundamentals have been proposed in the literature: those implied by purchasing-power parity, uncovered interest parity, and the flexible-price monetary model. We first ask which of these three alternative fundamentals has the most predictive power. Secondly, we ask if pooling across currencies or if using multivariate statistical techniques improves prediction accuracy over standard regression techniques. Thirdly, we examine whether the conclusions drawn from statistical analyses of in-sample econometric estimates concerning long-horizon convergence of exchange rates and their fundamentals coincide with those implied by analyses of out-of-sample forecasts. The short answers to these questions are; the monetary-model fundamentals, yes, and a qualified no. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 1 (1996)
Issue (Month): 4 (October)
Pages: 229-50

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Handle: RePEc:ijf:ijfiec:v:1:y:1996:i:4:p:229-50

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Cited by:
  1. Mark, Nelson C & Wu, Yangru, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(451), pages 1686-1706, November.
  2. JamesR. Lothian & MarkP. Taylor, 2008. "Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 118(532), pages 1742-1763, October.
  3. Emmanuel Davradakis, 2005. "Macroeconomic fundamentals and exchange rates: a non-parametric cointegration analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 15(7), pages 439-446.
  4. Yunus Aksoy & Kurmas Akdogan, 2006. "Exchange Rates and Fundamentals: Is there a Role for Nonlinearities in Real Time?," Computing in Economics and Finance 2006 12, Society for Computational Economics.
  5. Nelson C. Mark & Yangru Wu, 1997. "Risk, Policy Rules, and Noise: Rethinking Deviations from Uncovered Interest Parity," Tinbergen Institute Discussion Papers 97-041/2, Tinbergen Institute.
  6. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(1), pages 33-53, February.
  7. Morales-Arias, Leonardo & Moura, Guilherme V., 2013. "Adaptive forecasting of exchange rates with panel data," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(3), pages 493-509.
  8. Molodtsova, Tanya & Papell, David H., 2009. "Out-of-sample exchange rate predictability with Taylor rule fundamentals," Journal of International Economics, Elsevier, vol. 77(2), pages 167-180, April.
  9. repec:dgr:uvatin:2097041 is not listed on IDEAS
  10. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
  11. Nelson C. Mark & Yangru Wu, 1996. "Risk, Policy Rules, and Noise: Rethinking Deviations From Uncovered Interest Parity," Working Papers, Ohio State University, Department of Economics 014, Ohio State University, Department of Economics.
  12. Guy Meredith, 2003. "Medium-Term Exchange Rate Forecasting," IMF Working Papers 03/21, International Monetary Fund.
  13. Alexius, Annika, 2001. "How to Beat the Random Walk," Working Paper Series 175, Trade Union Institute for Economic Research.
  14. Menzie D. Chinn & Guy Meredith, 2005. "Testing Uncovered Interest Parity at Short and Long Horizons during the Post-Bretton Woods Era," NBER Working Papers 11077, National Bureau of Economic Research, Inc.

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