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Measuring the Economic Significance of Structural Exchange Rate Models

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  • Cerrato, Mario
  • Crosby, John
  • Kaleem, Muhammad

Abstract

This paper examines both the in-sample and out-of-sample performance of three monetary fundamental models of exchange rates and compares their out-of-sample performance to that of a simple Random Walk model. Using a data-set consisting of five currencies at monthly frequency over the period January 1980 to December 2009 and a battery of newly developed performance measures, the paper shows that monetary models do better (in-sample and out-of-sample forecasting) than a simple Random Walk model.

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File URL: http://repo.sire.ac.uk/handle/10943/350
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Bibliographic Info

Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2011-62.

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Date of creation: 2011
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Handle: RePEc:edn:sirdps:350

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Keywords: monetary models; forecasting;

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References

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  1. Frenkel, Jacob A, 1981. "Flexible Exchange Rates, Prices, and the Role of "News": Lessons from the 1970s," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 665-705, August.
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  14. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
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  16. Clarida, Richard & Sarno, Lucio & Taylor, Mark P & Valente, Giorgio, 2005. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," CEPR Discussion Papers 4835, C.E.P.R. Discussion Papers.
  17. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  18. Yufeng Han, 2006. "Asset Allocation with a High Dimensional Latent Factor Stochastic Volatility Model," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 237-271.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Exchange rate modelling: is the random walk beatable?
    by Economic Logician in Economic Logic on 2012-01-29 14:49:00

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