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Forecasting the dollar|euro exchange rate: are international parities useful?

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  • Emma Garcia

    (FEDEA, Spain)

  • Simón Sosvilla-rivero

    (FEDEA and Universidad Complutense de Madrid, Spain)

Abstract

In this paper we assess the empirical relevance of an expectations version of purchasing power parity in forecasting the dollar|euro exchange rate. This version is based on the differential of inflation expectations derived from inflation-indexed bonds for the euro area and the USA. Using the longest daily data for both the dollar|euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecasts. Copyright © 2005 John Wiley & Sons, Ltd.

Suggested Citation

  • Emma Garcia & Simón Sosvilla-rivero, 2005. "Forecasting the dollar|euro exchange rate: are international parities useful?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(5), pages 369-377.
    • Handle: RePEc:jof:jforec:v:24:y:2005:i:5:p:369-377
    DOI: 10.1002/for.955
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    References listed on IDEAS

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    1. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November.
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    4. F. FernAndez-RodrIguez & S. Sosvilla-Rivero & J. Andrada-FElix, 2003. "Technical analysis in foreign exchange markets: evidence from the EMS," Applied Financial Economics, Taylor & Francis Journals, vol. 13(2), pages 113-122.
    5. Boothe, Paul & Glassman, Debra, 1987. "Comparing exchange rate forecasting models : Accuracy versus profitability," International Journal of Forecasting, Elsevier, vol. 3(1), pages 65-79.
    6. Chinn, Menzie D. & Meese, Richard A., 1995. "Banking on currency forecasts: How predictable is change in money?," Journal of International Economics, Elsevier, vol. 38(1-2), pages 161-178, February.
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    Cited by:

    1. Alberto Fuertes & Simón Sosvilla-Rivero, 2019. "“Forecasting emerging market currencies: Are inflation expectations useful?”," IREA Working Papers 201918, University of Barcelona, Research Institute of Applied Economics, revised Oct 2019.
    2. Yu Hsing & Bruno S. Sergi, 2009. "The dollar/euro exchange rate and a comparison of major models," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 10(3), pages 199-205, April.
    3. Bergmeir, Christoph & Costantini, Mauro & Benítez, José M., 2014. "On the usefulness of cross-validation for directional forecast evaluation," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 132-143.

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