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Forecasting Performance of Exponential Smooth Transition Autoregressive Exchange Rate Models

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  • Ahmad Baharumshah

    ()

  • Venus Liew

Abstract

This paper compares the forecasting performance of the Smooth Transition Autoregressive (STAR) model with the conventional linear Autoregressive (AR) and Simple Random Walk (SRW) models. The empirical analysis was conducted using quarterly data for the yen-based currencies of six major East Asian countries. We discovered strong evidence on nonlinear mean reversion in deviation from purchasing power parity (PPP). The results suggest that both the STAR and AR models outperform or at least match the performance of the SRW model. The results also show that the STAR model outperforms the AR model, its linear competitor in a 14-quarter forecast horizon. This finding is consistent with the emerging line of research that emphasizes the importance of allowing nonlinearity in the adjustment of exchange rate. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11079-006-6812-7
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 17 (2006)
Issue (Month): 2 (April)
Pages: 235-251

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Handle: RePEc:kap:openec:v:17:y:2006:i:2:p:235-251

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: autoregressive; smooth transition autoregressive; nonlinear time series; forecasting accuracy;

References

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  8. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
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  11. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
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  13. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
  14. Winston Lin & Yueh Chen, 1998. "Forecasting foreign exchange rates with an intrinsically nonlinear dynamic speed of adjustment model," Applied Economics, Taylor & Francis Journals, vol. 30(3), pages 295-312.
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Citations

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Cited by:
  1. Chan, Tze-Haw & Lye, Chun Teck & Hooy, Chee-Wooi, 2010. "Forecasting Malaysian Exchange Rate: Do Artificial Neural Networks Work?," MPRA Paper 26326, University Library of Munich, Germany.
  2. Liew, Venus Khim-Sen & Baharumshah, Ahmad Zubaidi & Habibullah, Muzafar Shah & Midi, Habshah, 2008. "Monetary exchange rate model: supportive evidence from nonlinear testing procedures," MPRA Paper 7293, University Library of Munich, Germany.
  3. Liew Khim Sen & Ahmad Zubaidi Baharumshah & Choo Wei Chong & Habshah Midi, 2003. "A Non-parametric Bootstrap Simulation Study in ESTAR (1) Model," GE, Growth, Math methods 0307005, EconWPA.
  4. Venus Khim-Sen Liew & Zhuo Qiao & Wing-keung Wong, 2010. "Linearity and stationarity of G7 government bond returns," Economics Bulletin, AccessEcon, vol. 30(4), pages 2642-2655.
  5. Pede, Valerien O. & Florax, Raymond J.G.M. & Holt, Matthew T., 2008. "Modeling Non-Linear Spatial Dynamics: A Family of Spatial STAR Models and an Application to U.S. Economic Growth," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6518, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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