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Exchange Rates Forecasting: Can Jump Models Combined with Macroeconomic Fundamentals Help?

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  • Tomáš Bunčák

Abstract

Connection between macroeconomic variables and foreign exchange (FX) rates evaluated in the context of out-of-sample forecasting is a well-known problem in economics. We propose a method that utilizes stochastic models based on jump processes (namely the normal inverse Gaussian and Meixner models), combines them with macroeconomic fundamentals, and using a moving (rolling or recursive) regularized estimation procedure produces forecasts of FX rates. These are compared to benchmark models, namely the direct forecast and the Gauss model forecast. Empirical out-of-sample experiments are performed on EUR/USD and USD/DKK currencies.

Suggested Citation

  • Tomáš Bunčák, 2016. "Exchange Rates Forecasting: Can Jump Models Combined with Macroeconomic Fundamentals Help?," Prague Economic Papers, Prague University of Economics and Business, vol. 2016(5), pages 527-546.
    • Handle: RePEc:prg:jnlpep:v:2016:y:2016:i:5:id:581:p:527-546
    DOI: 10.18267/j.pep.581
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    References listed on IDEAS

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    More about this item

    Keywords

    cross-validation; out-of-sample testing; macroeconomic fundamentals; jump processes; exchange rates forecasting;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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