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Exchange Rates Forecasting Model: An Alternative Estimation Procedure

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Author Info

  • Ahmad Zubaidi Baharumshah

    (Universiti Putra Malaysia)

  • Liew Khim Sen

    (Universiti Putra Malaysia)

  • Lim Kian Ping

    (Universiti Malaysia Sabah)

Abstract

This study proposes an alternative procedure for modelling exchange rates behaviour, which is a linear combination of a long-run function and a short-run function. Our procedure involves modelling of the long- run relationship and this is followed by the short-run function. Among all the possible combination of modelling techniques, we proposed the simplest form, namely modelling the long-run function by the well established purchasing power parity (PPP) based model and setting up the short-run function based on its time series properties. Results of this study suggests that our procedure yields powerful forecasting models as they easily outperform the simple random walk model--which is rarely defeated in the literature of exchange rate forecasting--in term of out- of-sample forecasting, for all the forecast horizons ranging from one to fourteen quarters. This study provides us with some hope of achieving a reasonable forecast for the ASEAN currencies using the fundamental monetary model just by a simple adaptation.

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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0307005.

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Date of creation: 23 Jul 2003
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Handle: RePEc:wpa:wuwpif:0307005

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Related research

Keywords: forecasting; exchange rate; purchasing power parity; interest rate differential; mean deviation; mean percentage error; Fisher's sign test;

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Cited by:
  1. Venus Khim-Sen Liew & Ahmad Zubaidi Baharumshah & Kian-Ping Lim, 2004. "On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity," International Trade 0405004, EconWPA.

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