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Forecasting Disconnected Exchange Rates

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  • Travis J. Berge

Abstract

SUMMARY The inability of empirical models to forecast exchange rates has given rise to the belief that exchange rates are disconnected from macroeconomic fundamentals. This paper addresses the potential disconnect by endogenously selecting forecast models from a broad set of fundamentals. The procedure shows that exchange rates are not disconnected from fundamentals, but fundamentals vary in their predictive content at different forecast horizons and for different currencies. Performing model selection out‐of‐sample is challenging. At short horizons, the method cannot outperform a random walk, although the performance is improved at long horizons. These findings are confirmed across currencies and forecast evaluation methods. Copyright © 2013 John Wiley & Sons, Ltd.

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  • Travis J. Berge, 2014. "Forecasting Disconnected Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(5), pages 713-735, August.
  • Handle: RePEc:wly:japmet:v:29:y:2014:i:5:p:713-735
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    1. repec:eee:intfor:v:33:y:2017:i:4:p:894-914 is not listed on IDEAS
    2. Joscha Beckmann & Rainer Schüssler, 2014. "Forecasting Exchange Rates under Model and Parameter Uncertainty," CQE Working Papers 3214, Center for Quantitative Economics (CQE), University of Muenster.
    3. Beckmann, Joscha & Schüssler, Rainer, 2016. "Forecasting exchange rates under parameter and model uncertainty," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 267-288.
    4. Joseph P. Byrne & Dimitris Korobilis & Pinho J. Ribeiro, 2018. "On The Sources Of Uncertainty In Exchange Rate Predictability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(1), pages 329-357, February.
    5. Pierdzioch, Christian & Risse, Marian & Rohloff, Sebastian, 2016. "A boosting approach to forecasting the volatility of gold-price fluctuations under flexible loss," Resources Policy, Elsevier, vol. 47(C), pages 95-107.
    6. repec:eee:empfin:v:44:y:2017:i:c:p:158-176 is not listed on IDEAS

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