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  • Lorenzo Giorgianni
  • Jeremy Berkowitz
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    Abstract

    Several 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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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=2094
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 97/6.

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    Length: 21
    Date of creation: 01 Jan 1997
    Date of revision:
    Handle: RePEc:imf:imfwpa:97/6

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    Cited by:
    1. Kilian, Lutz, 1999. "Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 491-510, Sept.-Oct.
    2. Nelson Mark & Donggyu Sul, 1998. "Norminal Exchange Rates and Monetary Fundamentals: Evidence from a Small Post-Bretton Woods Panel," Working Papers 98-19, Ohio State University, Department of Economics.
    3. W A Razzak & Thomas Grennes, 1998. "The long-run nominal exchange rate: specification and estimation issues," Reserve Bank of New Zealand Discussion Paper Series G98/5, Reserve Bank of New Zealand.
    4. Ahmad Zubaidi Baharumshah & Liew Khim Sen, 2003. "The Predictability of ASEAN-5 Exchange Rates," International Finance 0307004, EconWPA.
    5. 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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