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Nonlinear prediction of Malaysian exchange rate with monetary fundamentals

  • Chun-Teck Lye

    ()

    (Multimedia University)

  • Tze-Haw Chan

    ()

    (Universiti Sains Malaysia)

  • Chee-Wooi Hooy

    ()

    (Universiti Sains Malaysia)

This paper compares one-step-ahead out-of-sample predictions on Malaysian Ringgit-US Dollar exchange rate using the generalized regression neural network for a range of forecasting horizons from 1991M3 to 2008M8. We find that the monetary fundamentals are significant in explaining the dynamics of Malaysian exchange rate in a longer forecast horizon as the performance of monetary exchange rate models outperformed the random walk benchmark model. The results also revealed that Malaysian exchange rate market provides profitable short-term arbitrage opportunities with lagged observations, and the integration of autoregressive terms into the monetary exchange rate models enhanced the out-of-sample forecasting performance.

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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P177.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 3 ()
Pages: 1960-1967

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Handle: RePEc:ebl:ecbull:eb-10-00808
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  10. Rapach, David E. & Wohar, Mark E., 2002. "Testing the monetary model of exchange rate determination: new evidence from a century of data," Journal of International Economics, Elsevier, vol. 58(2), pages 359-385, December.
  11. Azad, A.S.M. Sohel, 2009. "Random walk and efficiency tests in the Asia-Pacific foreign exchange markets: Evidence from the post-Asian currency crisis data," Research in International Business and Finance, Elsevier, vol. 23(3), pages 322-338, September.
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