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Forecasting the dollar|euro exchange rate: are international parities useful?

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Author Info
Emma Garcia (FEDEA, Spain)
Simón Sosvilla-rivero (FEDEA and Universidad Complutense de Madrid, Spain)

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Abstract

In this paper we assess the empirical relevance of an expectations version of purchasing power parity in forecasting the dollar|euro exchange rate. This version is based on the differential of inflation expectations derived from inflation-indexed bonds for the euro area and the USA.

Using the longest daily data for both the dollar|euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecasts. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.955
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 24 (2005)
Issue (Month): 5 ()
Pages: 369-377
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Handle: RePEc:jof:jforec:v:24:y:2005:i:5:p:369-377

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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