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Long horizon predictability of exchange rates: Is it for real?

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  • Jan J. J. Groen

    ()
    (Tinbergen Institute, Erasmus University Rotterdam, P.O. Box 1738, NL-3000 DR Rotterdam, The Netherlands)

Abstract

This paper reexamines recent results on the predictability of nominal exchange rate returns by means of fundamental models. Using a monthly sample of the post-Bretton Woods period we show that the in-sample fit between long-horizon exchange rate returns and various models is not significant if we correct for the persistence that is caused by overlapping data and spurious regression phenomena. The long horizon out-of-sample predictive power of the fundamental exchange rate models is found to be very weak. This is especially the case when we conduct the out-of-sample forecasting tests for a longer time span than that of earlier papers. We show that this failure in forecasting performance, resulting from extending the time span, is due to the absence of cointegration between exchange rates and structural exchange rate models.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 24 (1999)
Issue (Month): 3 ()
Pages: 451-469

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Handle: RePEc:spr:empeco:v:24:y:1999:i:3:p:451-469

Note: received: September 1997/final version received: November 1998
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Related research

Keywords: Exchange rates · forecasting · pooled forecasting · random walk;

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