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Forecasting and Combining Competing Models of Exchange Rate Determination

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Author Info
Carlo Altavilla ()
Paul De Grauwe ()

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Abstract

This paper investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and its underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1747.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1747

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Related research
Keywords: non-linearity; exchange rate modelling; forecasting;

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
F31 - International Economics - - International Finance - - - Foreign Exchange

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    Other versions:
  5. Yongmiao Hong & Tae-Hwy Lee, 2003. "Inference on Predictability of Foreign Exchange Rates via Generalized Spectrum and Nonlinear Time Series Models," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1048-1062, 09. [Downloadable!] (restricted)
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