Exploiting The Information Of Stock Market To Forecast Exchange Rate Movements
The present study examines dynamic relation between stock index and exchange rate by using the daily data for India. The empirical evidence suggests that there is no long-run relationship; how-ever, there is bidirectional causality between stock index and exchange rates. The findings of the causality tests strongly support portfolio or macroeconomic approach on the relationship between ex-change rates and stock prices. An attempt is also made to forecast daily returns of INR/USD exchange rates by exploiting the information of causal relationship between exchange rates and stock index us-ing Vector autoregression (VAR) model. VAR’s out-of-sample performance is benchmarked against the traditional ARIMA model. The potential of the two models are rigorously evaluated by employing a cross-validation scheme and statistical metrics like mean absolute error, root mean square error and directional accuracy. Out-of-sample performance shows that VAR model is robust, and consis-tently produces superior predictions than ARIMA model.
Volume (Year): 56 (2009)
Issue (Month): (November)
|Contact details of provider:|| Postal: |
Phone: 004 0232 201070
Fax: 004 0232 217000
Web page: http://anale.feaa.uaic.ro/anale/
More information through EDIRC
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.:
- Leung, Mark T. & Daouk, Hazem & Chen, An-Sing, 2000. "Forecasting stock indices: a comparison of classification and level estimation models," International Journal of Forecasting, Elsevier, vol. 16(2), pages 173-190.
- Gencay, Ramazan, 1999. "Linear, non-linear and essential foreign exchange rate prediction with simple technical trading rules," Journal of International Economics, Elsevier, vol. 47(1), pages 91-107, February.
- Giancarlo Gandolfo & Pietro Carlo Padoan & Giovanna Paladino, 1990. "Structural Models vs Random Walk: The Case of the Lira/$ Exchange Rate," Eastern Economic Journal, Eastern Economic Association, vol. 16(2), pages 101-113, Apr-Jun.
- Woo, Wing T., 1985. "The monetary approach to exchange rate determination under rational expectations: The dollar-deutschmark rate," Journal of International Economics, Elsevier, vol. 18(1-2), pages 1-16, February.
- Dagfinn Rime & Lucio Sarno & Elvira Sojli, 2007.
"Exchange rate forecasting, order flow and macroeconomic information,"
2007/02, Norges Bank.
- Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
- Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2009. "Exchange Rate Forecasting, Order Flow and Macroeconomic Information," CEPR Discussion Papers 7225, C.E.P.R. Discussion Papers.
- Schinasi, Garry J. & Swamy, P. A. V. B., 1989.
"The out-of-sample forecasting performance of exchange rate models when coefficients are allowed to change,"
Journal of International Money and Finance,
Elsevier, vol. 8(3), pages 375-390, September.
- Garry J. Schinasi & P.A.V.B. Swamy, 1987. "The out-of-sample forecasting performance of exchange rate models when coefficients are allowed to change," International Finance Discussion Papers 301, Board of Governors of the Federal Reserve System (U.S.).
- Garry J. Schinasi & P.A.V.B. Swamy, 1987. "The out-of-sample forecasting performance of exchange rate models when coefficients are allowed to change," Special Studies Papers 212, Board of Governors of the Federal Reserve System (U.S.).
- Gandolfo, Giancarlo & Padoan, Pietro Carlo & Paladino, Giovanna, 1990. "Exchange rate determination: Single-equation or economy-wide models? : A test against the random walk," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 965-992, November.
- Litterman, Robert B, 1986.
"Forecasting with Bayesian Vector Autoregressions-Five Years of Experience,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 4(1), pages 25-38, January.
- Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
- Vygodina, Anna V., 2006. "Effects of size and international exposure of the US firms on the relationship between stock prices and exchange rates," Global Finance Journal, Elsevier, vol. 17(2), pages 214-223, December.
- Phylaktis, Kate & Ravazzolo, Fabiola, 2005. "Stock prices and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1031-1053, November.
- Della Corte, Pasquale & Sarno, Lucio & Tsiakas, Ilias, 2007.
"An Economic Evaluation of Empirical Exchange Rate Models,"
CEPR Discussion Papers
6598, C.E.P.R. Discussion Papers.
- Pasquale Della Corte & Lucio Sarno & Ilias Tsiakas, 2009. "An Economic Evaluation of Empirical Exchange Rate Models," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3491-3530, September.
- Kuan, Chung-Ming & Liu, Tung, 1995. "Forecasting Exchange Rates Using Feedforward and Recurrent Neural Networks," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 347-64, Oct.-Dec..
- Qi, Min & Wu, Yangru, 2003. "Nonlinear prediction of exchange rates with monetary fundamentals," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 623-640, December.
When requesting a correction, please mention this item's handle: RePEc:aic:journl:y:2009:v:56:p:563-575. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sireteanu Napoleon-Alexandru)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.