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Testing the asset pricing model of exchange rates with survey data

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  • Anna Naszódi

    () (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

This paper proposes a new test for the asset pricing model of the exchange rate. It examines whether the way market analysts generate their forecasts is closer to the one implied by the asset pricing model, or to any of those implied by some alternative models. The asset pricing model is supported by the test since it has significantly better out-of-sample fit on survey data than simpler models including the random walk. The traditional test based on forecasting ability is applied as well. The asset pricing model proves to have better forecast accuracy in case of some exchange rates and forecast horizons than the random walk.

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File URL: http://english.mnb.hu/Root/Dokumentumtar/ENMNB/Kiadvanyok/mnben_mnbfuzetek/WP_2011_02.pdf
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Bibliographic Info

Paper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Working Papers with number 2011/2.

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Length: 44 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mnb:wpaper:2011/2

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Keywords: asset pricing exchange rate model; present value model of exchange rate; survey data;

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  1. Charles Engel & Nelson C. Mark & Kenneth D. West, 2007. "Exchange Rate Models Are Not as Bad as You Think," NBER Working Papers 13318, National Bureau of Economic Research, Inc.
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  16. Burda, Michael C & Gerlach, Stefan, 1990. "Exchange Rate Dynamics and Currency Unification: The Ostmark-DM Rate," CEPR Discussion Papers 485, C.E.P.R. Discussion Papers.
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