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Nowcasting of the Short-run Euro-Dollar Exchange Rate with Economic Fundamentals and Time-varying Parameters

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  • Yemba, Boniface P.
  • Otunuga, Olusegun Michael
  • Tang, Biyan
  • Biswas, Nabaneeta

Abstract

This paper nowcasts the Euro-Dollar short-run exchange rate by using a MF-TVP-FAVAR model. The FAVAR framework improves forecasting accuracy by expanding the information set of the previously widely used VAR models. We adopt a flexible modelling approach that adjusts for structural breaks in the data and money demand instability; it also prevents information loss due to variables being quoted at mixed frequencies. We estimate our model by using a dual conditionality linear Kalman filtering/smoothing. Our results indicate that the specified model outperforms the Random Walk and other structural models at all forecasting horizons.

Suggested Citation

  • Yemba, Boniface P. & Otunuga, Olusegun Michael & Tang, Biyan & Biswas, Nabaneeta, 2023. "Nowcasting of the Short-run Euro-Dollar Exchange Rate with Economic Fundamentals and Time-varying Parameters," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007474
    DOI: 10.1016/j.frl.2022.103571
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    More about this item

    Keywords

    Euro-Dollar; Divisia monetary aggregates; Exchange rate nowcasting; FAVAR; Mixed frequencies;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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