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Forecasting exchange rates out-of-sample with panel methods and real-time data

  • Ince, Onur

This paper evaluates out-of-sample exchange rate forecasting with Purchasing Power Parity (PPP) and Taylor rule fundamentals for 9 OECD countries vis-à-vis the U.S. dollar over the period from 1973:Q1 to 2009:Q1 at short and long horizons. In contrast with previous work, which reports “forecasts” using revised data, I construct a quarterly real-time dataset that incorporates only the information available to market participants when the forecasts were made. Using bootstrapped out-of-sample test statistics, the exchange rate model with Taylor rule fundamentals performs better at the one-quarter horizon and panel estimation is not able to improve its performance. The PPP model, however, forecasts better at the 16-quarter horizon and its performance increases in panel framework. The results are in accord with previous research on PPP and Taylor rule models.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 43 (2014)
Issue (Month): C ()
Pages: 1-18

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Handle: RePEc:eee:jimfin:v:43:y:2014:i:c:p:1-18
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