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Adaptive forecasting of exchange rates with panel data

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  • Morales-Arias, Leonardo
  • Moura, Guilherme V.

Abstract

This article investigates the statistical and economic implications of adaptive forecasting of exchange rates with panel data. The candidate exchange rate predictors are drawn from (i) macroeconomic ‘fundamentals’, (ii) returns/volatility of asset markets, and (iii) cyclical and confidence indices. The proposed forecasting strategy exploits information from many dimensions, since it generates alternative exchange rate forecasts at various horizons from each of the potential predictors using single market, mean group and pooled estimates by means of rolling window and recursive forecasting schemes. The capabilities of single predictors and of alternative adaptive techniques for combining the generated exchange rate forecasts are evaluated robustly by means of statistical and economic performance measures. The results show that combining exchange rate forecasts generated from a wide range of information sets reduces ex-ante uncertainty, improves forecasting precision and leads to better market timing than most single predictors.

Suggested Citation

  • Morales-Arias, Leonardo & Moura, Guilherme V., 2013. "Adaptive forecasting of exchange rates with panel data," International Journal of Forecasting, Elsevier, vol. 29(3), pages 493-509.
  • Handle: RePEc:eee:intfor:v:29:y:2013:i:3:p:493-509
    DOI: 10.1016/j.ijforecast.2012.10.007
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    Cited by:

    1. Wagner Piazza Gaglianone & Jaqueline Terra Moura Marins, 2014. "Risk Assessment of the Brazilian FX Rate," Working Papers Series 344, Central Bank of Brazil, Research Department.
    2. Caldeira, João F. & Moura, Guilherme V. & Santos, André A.P., 2016. "Predicting the yield curve using forecast combinations," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 79-98.
    3. Kouwenberg, Roy & Markiewicz, Agnieszka & Verhoeks, Ralph & Zwinkels, Remco C. J., 2017. "Model Uncertainty and Exchange Rate Forecasting," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(01), pages 341-363, February.
    4. repec:sgh:erfinj:v:2:y:2017:i:1:p:1-21 is not listed on IDEAS
    5. Wagner Piazza Gaglianone & Osmani Teixeira de Carvalho Guillén & Francisco Marcos Rodrigues Figueiredo, 2015. "Local Unit Root and Inflationary Inertia in Brazil," Working Papers Series 406, Central Bank of Brazil, Research Department.
    6. repec:eee:intfor:v:33:y:2017:i:3:p:707-728 is not listed on IDEAS
    7. Gaglianone, Wagner Piazza & Marins, Jaqueline Terra Moura, 2017. "Evaluation of exchange rate point and density forecasts: An application to Brazil," International Journal of Forecasting, Elsevier, vol. 33(3), pages 707-728.

    More about this item

    Keywords

    Exchange rate forecasting; Panel data; Forecast combinations; Market timing;

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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