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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)

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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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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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Find related papers by JEL classification:
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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References listed on IDEAS
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(explanations, 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.)

  1. Venus Khim-Sen Liew & Ahmad Zubaidi Baharumshah & Kian-Ping Lim, 2003. "On Singaporean Dollar-U.S. Dollar and Purchasing Power Parity," International Finance 0309001, EconWPA, revised 01 Nov 2004. [Downloadable!]
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