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Evaluating non-linear models on point and interval forecasts: an application with exchange rate returns

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  • G. Boero

    ()

  • E. Marrocu

    ()

Abstract

The aim of this paper is to compare the forecasting performance of SETAR and GARCH models against a linear benchmark using historical data for the returns of the Japanese yen/US dollar exchange rate. The relative performance of the models is evaluated on point forecasts and on interval forecasts. Point forecasts evaluation over the whole forecast period indicates that the performance of the models, when distinguishable, tends to favour the linear models. However, we show that if the evaluation of point forecasts is conducted over distinct subsamples or specific regimes there is more evidence of forecasting gains, especially from the SETAR models. Moreover, when we evaluate the validity of interval forecasts, the results produce clear evidence of the superiority of the non-linear models, and tend to favour especially the GARCH models.

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Bibliographic Info

Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 200110.

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Date of creation: 2001
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Handle: RePEc:cns:cnscwp:200110

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Related research

Keywords: nonlinearity; asymmetry; forecasting accuracy; point forecasts; interval forecasts; exchange rates;

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References

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  1. David Peel & Alan Speight, 1994. "Testing for non-linear dependence in inter-war exchange rates," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 130(2), pages 391-417, June.
  2. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  3. Francis X. Diebold & James M. Nason, 1989. "Nonparametric exchange rate prediction?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 81, Board of Governors of the Federal Reserve System (U.S.).
  4. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(5), pages 931-955, September.
  5. Meese, Richard A & Rose, Andrew K, 1991. "An Empirical Assessment of Non-linearities in Models of Exchange Rate Determination," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(3), pages 603-19, May.
  6. Wallis, Kenneth F., 2001. "Chi-squared tests of interval and density forecasts and the Bank of England's fan charts," Working Paper Series, European Central Bank 0083, European Central Bank.
  7. G. Boero & E. Marrocu, 1999. "Modelli non lineari per i tassi di cambio: un confronto previsivo," Working Paper CRENoS 199914, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  8. Boero, Gianna & Marrocu, Emanuela, 2002. "The Performance of Non-linear Exchange Rate Models: A Forecasting Comparison," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(7), pages 513-42, November.
  9. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1779-1801, December.
  10. Clements, Michael P & Smith, Jeremy, 1999. "A Monte Carlo Study of the Forecasting Performance of Empirical SETAR Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(2), pages 123-41, March-Apr.
  11. Clements, Michael P. & Smith, Jeremy, 2001. "Evaluating forecasts from SETAR models of exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(1), pages 133-148, February.
  12. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0169, National Bureau of Economic Research, Inc.
  13. Clements, Michael P. & Smith, Jeremy, 1997. "The performance of alternative forecasting methods for SETAR models," International Journal of Forecasting, Elsevier, Elsevier, vol. 13(4), pages 463-475, December.
  14. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  15. Krager, Horst & Kugler, Peter, 1993. "Non-linearities in foreign exchange markets: a different perspective," Journal of International Money and Finance, Elsevier, Elsevier, vol. 12(2), pages 195-208, April.
  16. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-62, November.
  17. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  18. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 391-407, March.
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Cited by:
  1. Duarte, Agustin & Venetis, Ioannis A. & Paya, Ivan, 2005. "Predicting real growth and the probability of recession in the Euro area using the yield spread," International Journal of Forecasting, Elsevier, Elsevier, vol. 21(2), pages 261-277.
  2. G. Boero & E. Marrocu, 2002. "The performance of Setar Models: a regime conditional evaluation of point, interval and density forecasts," Working Paper CRENoS 200208, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  3. G. Marletto, 2006. "La politica dei trasporti come politica per l’innovazione: spunti da un approccio evolutivo," Working Paper CRENoS 200605, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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