Exchange Rates Forecasting Model: An Alternative Estimation Procedure
AbstractThis 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 InfoPaper provided by EconWPA in its series International Finance with number 0307005.
Date of creation: 23 Jul 2003
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forecasting; exchange rate; purchasing power parity; interest rate differential; mean deviation; mean percentage error; Fisher's sign test;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-07-29 (All new papers)
- NEP-ECM-2003-08-01 (Econometrics)
- NEP-ETS-2003-07-29 (Econometric Time Series)
- NEP-IFN-2003-07-29 (International Finance)
- NEP-RMG-2003-07-29 (Risk Management)
- NEP-SEA-2003-07-29 (South East Asia)
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