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Evaluating the Predictability of Exchange Rates Using Long-Horizon Regressions: Mind Your p's and q's!

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Author Info
McCracken, Michael W
Sapp, Stephen G

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Abstract

Since the breakdown of the Bretton Woods agreement, researchers have used a wide variety of structural models to try to predict exchange rate movements. Unfortunately, finding consistent evidence that these models outperform a random walk has proven elusive. In this paper, we investigate the impact different methods of inference may have had on these conclusions. Using p-values based on recently developed tests of forecast accuracy and encompassing, as well as q-values designed to mitigate multiple testing problems, we provide stronger evidence consistent with these models having superior predictive ability. Our results suggest that previous studies' inability to detect predictive ability may have been influenced by the statistics used and the manner in which they were employed.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 37 (2005)
Issue (Month): 3 (June)
Pages: 473-94
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Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:3:p:473-94

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Jorge Selaive & Vicente Tuesta, 2004. "Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates?," International Finance 0404014, EconWPA. [Downloadable!]
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  2. Sarno, Lucio & Valente, Giorgio, 2008. "Exchange Rates and Fundamentals: Footloose or Evolving Relationship?," CEPR Discussion Papers 6638, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Todd E. Clark & Kenneth D. West, 2004. "Using out-of-sample mean squared prediction errors to test the Martingale difference hypothesis," Research Working Paper RWP 04-03, Federal Reserve Bank of Kansas City. [Downloadable!]
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  5. Yin-Wong Cheung & Menzie Chinn & Antonio Garcia Pascual, 2003. "Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?," Santa Cruz Department of Economics, Working Paper Series 1033, Department of Economics, UC Santa Cruz. [Downloadable!]
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  6. Michael Bleaney, . "Fundamentals And Exchange Rate Volatility," Discussion Papers 06/03, University of Nottingham, School of Economics. [Downloadable!]
  7. Norman Swanson & Valentina Corradi, 2006. "Nonparametric Bootstrap Procedures for Predictive Inference Based on Recursive Estimation Schemes," Departmental Working Papers 200618, Rutgers University, Department of Economics. [Downloadable!]
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  8. Todd E. Clark & Kenneth D. West, 2005. "Using Out-of-Sample Mean Squared Prediction Errors to Test the Martingale Difference," NBER Technical Working Papers 0305, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Menzie D. Chinn & Ron Alquist, 2006. "Conventional and Unconventional Approaches to Exchange Rate Modeling and Assessment," NBER Working Papers 12481, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Valentina Corradi & Norman Swanson, 2004. "Predective Density and Conditional Confidence Interval Accuracy Tests," Departmental Working Papers 200423, Rutgers University, Department of Economics. [Downloadable!]
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