Long-horizon exchange rate predictability?
AbstractSeveral authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. We show that such a procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates and diagnostic statistics suggest a high degree of predictability of the dependent variable. We apply a simple modification of the long-horizon regression due to Jegadeesh (1991), which may provide more accurate inferences for researchers interested in comparing short and long-run predictability of U.S. dollar exchange rates.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-39.
Date of creation: 1996
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