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The out-of-sample forecasting performance of non-linear models of real exchange rate behaviour: The case of the South African Rand

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Author Info

  • Goodness C. Aye

    ()
    (Department of Economics, University of Pretoria)

  • Mehmet Balcilar

    ()
    (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey)

  • Adel Bosch

    ()
    (Department of Economics, University of Pretoria)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Francois Stofberg

    ()
    (Department of Economics, University of Pretoria)

Abstract

This paper analyses the out-of-sample forecasting performance of non-linear vs. linear models for the South African Rand against the United States dollar and the British Pound, in real terms. We compare the forecasting performance of point, interval and density forecasts for non-linear Band- TAR and ESTAR models to linear autoregressive models. Our data spans from 1970:01 to 2012:07, and we found that there are no significant gains from using either the Band-TAR or ESTAR non-linear models, compared to the linear AR model in terms of out-of-sample forecasting performance, especially at short horizons. We draw similar conclusions to other literature, and find that for the South African rand against the United States dollar and British pound, non-linearities are too weak for Band-TAR and ESTAR models to estimate.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201304.

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Length: 26 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:pre:wpaper:201304

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Keywords: Real exchange rate; Transaction costs; Band-threshold autoregressive model; Exponential smooth transition autoregressive model; Point forecast; Interval forecast; Density forecast; South Africa;

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