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Exchange rates, innovations and forecasting


  • Wolff, Christian C. P.


In this paper an ex-post forecasting experiment is performed on the basis of a version of the "news" model of exchange rate determination. A general finding is that the "news" formulation of monetary exchange rate models leads to relatively accurate ex post exchange rate forecasts. Often the results compare favourably with those obtained from the naive random walk forecasting rule. Thus, the evidence presented in this paper supports the argument that the 1983 finding by Meese and Rogoff (that structural models do not even outperform the random walk in an ex post forecasting experiment) may be due to the fact that the models were not properly tested in a "news" framework.
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  • Wolff, Christian C. P., 1988. "Exchange rates, innovations and forecasting," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 49-61, March.
  • Handle: RePEc:eee:jimfin:v:7:y:1988:i:1:p:49-61

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    References listed on IDEAS

    1. Cyert, Richard M & DeGroot, Morris H, 1974. "Rational Expectations and Bayesian Analysis," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 521-536, May/June.
    2. Flood, Robert P & Hodrick, Robert J, 1986. " Asset Price Volatility, Bubbles, and Process Switching," Journal of Finance, American Finance Association, vol. 41(4), pages 831-842, September.
    3. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
    4. Baxter, Marianne, 1985. "The role of expectations in stabilization policy," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 343-362, May.
    5. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
    6. Meese, Richard A, 1986. "Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 345-373, April.
    7. Maurice Obstfeld & Kenneth Rogoff, 1985. "Ruling Out Nonstationary Speculative Bubbles," NBER Working Papers 1601, National Bureau of Economic Research, Inc.
    8. Kenneth D. West, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 553-580.
    9. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    10. Merton, Robert C., 1985. "On the current state of the stock market rationality hypothesis," Working papers 1717-85., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:

    1. Coppes, Robert Christophor & Stokking, Evert Jan, 1996. "Credit risk exposure with interest and currency swaps," European Journal of Operational Research, Elsevier, vol. 91(2), pages 338-345, June.
    2. Kari Heimonen, 2006. "Time-Varying Fundamentals of the Euro-Dollar Exchange Rate," International Economic Journal, Taylor & Francis Journals, vol. 20(4), pages 385-407.
    3. Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 51-74.
    4. Nieh, Chien-Chung & Lee, Cheng-Few, 2001. "Dynamic relationship between stock prices and exchange rates for G-7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(4), pages 477-490.
    5. van Tol, Michel R & Wolff, Christian C, 2005. "Forecasting the Spot Exchange Rate with the Term Structure of Forward Premia: Multivariate Threshold Cointegration," CEPR Discussion Papers 4958, C.E.P.R. Discussion Papers.
    6. Cavaglia, Stefano M. F. G. & Wolff, Christian C. P., 1996. "A note on the determinants of unexpected exchange rate movements," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 179-188, January.
    7. 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.
    8. Lucio Sarno & Giorgio Valente & Mark E. Wohar, 2004. "Monetary Fundamentals and Exchange Rate Dynamics under Different Nominal Regimes," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 179-193, April.
    9. Francis Vitek, 2005. "The Exchange Rate Forecasting Puzzle," International Finance 0509005, EconWPA.
    10. Ajayi, Richard A & Mougoue, Mbodja, 1996. "On the Dynamic Relation between Stock Prices and Exchange Rates," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(2), pages 193-207, Summer.
    11. Madura, Jeff & Martin, A. D. & Wiley, Marilyn, 1999. "Forecast bias and accuracy of exchange rates in emerging markets," Journal of Multinational Financial Management, Elsevier, vol. 9(1), pages 27-43, January.
    12. repec:hur:ijaraf:v:7:y:2017:i:3:p:70-86 is not listed on IDEAS
    13. Mehran, Jamshid & Shahrokhi, Manuchehr, 1997. "An application of four foreign currency forecasting models to the U.S. dollar and Mexican peso," Global Finance Journal, Elsevier, vol. 8(2), pages 211-220.
    14. Patrick Artus, 1990. "Spéculateurs hétérogènes et chocs monétaires," Revue Économique, Programme National Persée, vol. 41(5), pages 895-922.

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