AbstractSeveral authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. By considering the implied vector error-correction model, we show that little is to be gained from estimating such regressions for horizons greater than one time period. We also show that in small to medium samples the long-horizon procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates, diagnostic statistics and graphical evidence incorrectly suggest a high degree of predictability of the dependent variable.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 97/6.
Date of creation: 01 Jan 1997
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- Nelson Mark, 1998. "Fundamentals of the Real Dollar-Pound Rate: 1871-1994," Working Papers 98-14, Ohio State University, Department of Economics.
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