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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. Rangan Gupta & Alain Kabundi, 2008. "Forecasting Macroeconomic Variables in a Small Open Economy: A Comparison between Small- and Large-Scale Models," Working Papers 200830, University of Pretoria, Department of Economics.
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  11. 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.
  12. Mtonga, Elvis, 2006. "The real exchange rate of the rand and competitiveness of South Africa's trade," MPRA Paper 1192, University Library of Munich, Germany.
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  16. Riane de Bruyn & Rangan Gupta & Renee van Eyden, 2013. "Forecasting The Rand-Dollar And Rand-Pound Exchange Rates Using Dynamic Model Averaging," Working Papers 201307, University of Pretoria, Department of Economics.
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