In this paper we consider forecasting daily exchange rate returns using neutral network models (NNs). Based on simulations, we argue (i) that neglected GARCH does not lead to spuriously successful NNs and (ii) that if there is nonlinearity in the conditional mean, NNs will exploit this for improved forecasting. In contrast, for our sample data we find that NNs do not yield favorable results. Our results raise several quesitons about the nature of possible nonlinearity in exchange rates.
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Paper provided by Erasmus University of Rotterdam - Econometric Institute in its series Papers with number
9650/a.
Find related papers by JEL classification: C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation F31 - International Economics - - International Finance - - - Foreign Exchange
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