The Performance of Non-linear Exchange Rate Models: A Forecasting Comparison

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The Performance of Non-linear Exchange Rate Models: A Forecasting Comparison

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Boero, Gianna
Marrocu, Emanuela

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Abstract

In recent years there has been a considerable development in modelling nonlinearities and asymmetries in economic and financial variables. The aim of the current paper is to compare the forecasting performance of different models for the returns of three of the most traded exchange rates in terms of the U.S. dollar, namely the French franc (FF/$), the German mark (DM/$) and the Japanese yen (Y/$). The relative performance of non-linear models of the SETAR, STAR and GARCH types is contrasted with their linear counterparts. The results show that if attention is restricted to mean square forecast errors, the performance of the models, when distinguishable, tends to favor the linear models. The forecast performance of the models is evaluated also conditional on the regime at the forecast origin and on density forecasts. This analysis produces more evidence of forecasting gains from non-linear models. Copyright © 2002 by John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 21 (2002)
Issue (Month): 7 (November)
Pages: 513-42
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Handle: RePEc:jof:jforec:v:21:y:2002:i:7:p:513-42

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Gianna Boero & J. Smith & KF. Wallis, 2002. "The properties of some goodness-of-fit tests," Working Paper CRENoS 200209, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
Other versions:
- Boero, Gianna & Smith, Jeremy & Wallis, Kenneth F, 2002. "The Properties Of Some Goodness-Of-Fit Tests," The Warwick Economics Research Paper Series (TWERPS) 653, University of Warwick, Department of Economics. [Downloadable!]
Armin Shmilovici & Yoav Kahiri & Irad Ben-Gal & Shmuel Hauser, 2009. "Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm," Computational Economics, Springer, vol. 33(2), pages 131-154, March. [Downloadable!] (restricted)
Other versions:
- Y. Kahiri & A. Shmilovici & S. Hauser, 2006. "Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm," Computing in Economics and Finance 2006 256, Society for Computational Economics.
B. Siliverstovs & D.J. Van Dijk, 2003. "Forecasting industrial production with linear, nonlinear and structural change models," Econometric Institute Report 321, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
Other versions:
- Siliverstovs, B. & Dijk, D.J.C. van, 2003. "Forecasting industrial production with linear, nonlinear, and structural change models," Econometric Institute Report EI 2003-16 Revision_Date:, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
Gianna Boero & Emanuela Marrocu, 2002. "The performance of Setar Models: a regime conditional evaluation of point, interval and density forecasts," Working Paper CRENoS 200208, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
Other versions:
- Boero, Gianna & Marrocu, Emanuela, 2003. "The Performance Of Setar Models : A Regime Conditional Evaluation Of Point, Interval And Density Forecasts," The Warwick Economics Research Paper Series (TWERPS) 663, University of Warwick, Department of Economics. [Downloadable!]
- Boero, Gianna & Marrocu, Emanuela, 2004. "The performance of SETAR models: a regime conditional evaluation of point, interval and density forecasts," International Journal of Forecasting, Elsevier, vol. 20(2), pages 305-320. [Downloadable!] (restricted)
G. Ascari & Emanuela Marrocu, 2003. "Forecasting inflation: a comparison of linear Phillips curve models and nonlinear time serie models," Working Paper CRENoS 200307, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
Teräsvirta, Timo, 2005. "Forecasting economic variables with nonlinear models," Working Paper Series in Economics and Finance 598, Stockholm School of Economics, revised 29 Dec 2005. [Downloadable!]
Other versions:
- Terasvirta, Timo, 2006. "Forecasting economic variables with nonlinear models," Handbook of Economic Forecasting, Elsevier. [Downloadable!] (restricted)
Teräsvirta, Timo & van Dijk, Dick & Medeiros, Marcelo, 2004. "Linear models, smooth transition autoregressions, and neural networks for forecasting macroeconomic time series: A re-examination," Working Paper Series in Economics and Finance 561, Stockholm School of Economics, revised 04 Nov 2004.
Other versions:
- Timo Teräsvirta & Dick van Dijk & Marcelo Cunha Medeiros, 2004. "Linear models, smooth transition autoregressions and neural networks for forecasting macroeconomic time series: A reexamination," Textos para discussÃ£o 485, Department of Economics PUC-Rio (Brazil). [Downloadable!]
- Terasvirta, Timo & van Dijk, Dick & Medeiros, Marcelo C., 2005. "Linear models, smooth transition autoregressions, and neural networks for forecasting macroeconomic time series: A re-examination," International Journal of Forecasting, Elsevier, vol. 21(4), pages 755-774. [Downloadable!] (restricted)
Sitzia, Bruno & Iovino, Doriana, 2008. "Nonlinearities in Exchange rates: Double EGARCH Threshold Models for Forecasting Volatility," MPRA Paper 8661, University Library of Munich, Germany. [Downloadable!]
Funke, Michael & Gronwald, Marc, 2007. "The Undisclosed Renminbi Basket: Are The Markets Telling Us Something About Where The Renminbi - US Dollar Exchange Rate Is Going?," BOFIT Discussion Papers 20/2007, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
Other versions:
- Michael Funke & Marc Gronwald, 2008. "The Undisclosed Renminbi Basket: Are the Markets Telling us something about where the Renminbi – US Dollar Exchange Rate is Going?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
- Michael Funke & Marc Gronwald, 2008. "The Undisclosed Renminbi Basket: Are the Markets Telling Us Something about Where the Renminbi-US Dollar Exchange Rate is Going?," The World Economy, Blackwell Publishing, vol. 31(12), pages 1581-1598, December. [Downloadable!] (restricted)
Gianna Boero & Emanuela Marrocu, 2001. "Evaluating non-linear models on point and interval forecasts: an application with exchange rate returns," Working Paper CRENoS 200110, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]

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