A Note on Long Horizon Forecasts of Nonlinear Models of Real Exchange Rates: Comments on Rapach and Wohar (2006)
AbstractWe show that long horizon forecasts from the nonlinear models that are considered in the study by Rapach and Wohar (2006) cannot generate any forecast gains over a simple AR(1) specification. This is contrary to the findings reported in Rapach and Wohar (2006). Moreover, we illustrate graphically that the nonlinearity in the forecasts from the ESTAR model is the strongest when forecasting one step-ahead and that it diminishes as the forecast horizon increases. There exists, therefore, no potential whatsoever for the considered nonlinear models to outperform linear ones when forecasting far ahead. We also illustrate graphically why one step-ahead forecasts from the nonlinear ESTAR model fail to yield superior predictions to a simple AR(1).
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Bibliographic InfoPaper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2008-02.
Length: 16 pages
Date of creation: Feb 2008
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PPP; regime modelling; nonlinear real exchange rate models; ESTAR; forecast evaluation;
Other versions of this item:
- Buncic, Daniel, 2008. "A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006)," MPRA Paper 6904, University Library of Munich, Germany.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-16 (All new papers)
- NEP-FOR-2008-02-16 (Forecasting)
- NEP-IFN-2008-02-16 (International Finance)
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