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Unpredictable After All? A short note on exchange rate predictability

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  • Moerman, G.A.

Abstract

Earlier research has shown that it is very hard to outperform the random walk model with respect to forecasting exchange rates. In this paper we propose an extension to the regular regime-switching model in order to capture the exchange rate dynamics. The model is extended by including macro-economic variables, like inflation and interest rates, into both regimes. The regimes not only have different means and volatility's, but also different sensitivities to the macro-economic variables. We will show that this approach doesn't work over the whole sample, although previous research work might indicate otherwise. Furthermore we will elaborate on sub samples, in which the model showed a better performance than the random walk model, and show that this is rather coincidence.

Suggested Citation

  • Moerman, G.A., 2001. "Unpredictable After All? A short note on exchange rate predictability," ERIM Report Series Research in Management ERS-2001-29-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:91
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    References listed on IDEAS

    as
    1. Franc Klaassen, 2005. "Long Swings in Exchange Rates: Are They Really in the Data?," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 87-95, January.
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    6. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-218, March.
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    More about this item

    Keywords

    econometrics; economic variables; exchange rates; forecasting; regime-switching model;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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