Andrea Carriero () (Queen Mary, University of London) George Kapetanios () (Queen Mary, University of London) Massimiliano Marcellino () (European University Institute and Bocconi University)
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Models based on economic theory have serious problems at forecasting exchange rates better than simple univariate driftless random walk models, especially at short horizons. Multivariate time series models suffer from the same problem. In this paper, we propose to forecast exchange rates with a large Bayesian VAR (BVAR), using a panel of 33 exchange rates vis-a-vis the US Dollar. Since exchange rates tend to co-move, the use of a large set of them can contain useful information for forecasting. In addition, we adopt a driftless random walk prior, so that cross-dynamics matter for forecasting only if there is strong evidence of them in the data. We produce forecasts for all the 33 exchange rates in the panel, and show that our model produces systematically better forecasts than a random walk for most of the countries, and at any forecast horizon, including at 1-step ahead.
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Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number
634.
Find related papers by JEL classification: C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis F31 - International Economics - - International Finance - - - Foreign Exchange
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Zwart, G.J. de & Markwat, T.D. & Swinkels, L. & Dijk, D.J.C. van, 2007.
"The Economic Value of Fundamental and Technical Information in Emerging Currency Markets,"
Research Paper
ERS-2007-096-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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