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The out-of-sample forecasting performance of non-linear models of real exchange rate behaviour: The case of the South African Rand

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  • Goodness C. Aye
  • Mehmet Balcilar
  • Adél Bosch
  • Rangan Gupta
  • Francois Stofberg

Abstract

This paper analyses the out-of-sample forecasting performance of non-linear vs. linear models for the South African rand against the United States dollar and the British pound, in real terms. We compare the forecasting performance of point, interval and density forecasts for non-linear Band-TAR and ESTAR models to linear autoregressive models. Our data spans from 1970:01 to 2012:07, and we found that there are no significant gains from using either the Band-TAR or ESTAR non-linear models, compared to the linear AR model in terms of out-of-sample forecasting performance, especially at short horizons. We draw similar conclusions to other literature, and find that for the South African rand against the United States dollar and British pound, non-linearities are too weak for Band-TAR and ESTAR models to estimate.

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Bibliographic Info

Article provided by Cattaneo University (LIUC) in its journal The European Journal of Comparative Economics.

Volume (Year): 10 (2013)
Issue (Month): 1 (April)
Pages: 121-148

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Handle: RePEc:liu:liucej:v:10:y:2013:i:1:p:121-148

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Keywords: Real exchange rate; Transaction costs; Band-threshold autoregressive model; Exponential smooth transition autoregressive model; Point forecast; Interval forecast; Density forecast; South Africa;

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  1. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
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  14. Lumengo Bonga-Bonga, 2009. "Forward Exchange Rate Puzzle: Joining the Missing Pieces in the Rand-US Dollar Exchange Market," Working Papers 122, Economic Research Southern Africa.
  15. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
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