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The role of economic uncertainty in forecasting exchange rate returns and realized volatility: Evidence from quantile predictive regressions

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  • Christina Christou
  • Rangan Gupta
  • Christis Hassapis
  • Tahir Suleman

Abstract

In this paper, we investigate whether the news‐based measure of economic policy uncertainty (EPU) can be used to forecast exchange rate returns and volatility using a quantile regression approach, which accounts for persistence and endogeneity, using data from 13 different countries. Our main findings suggest that: (i) EPU is useful for forecasting exchange rate returns and volatility, (ii) forecasting ability–quantile order relationships exhibit a U‐shape, possibly asymmetric form around the median; and (iii) asymmetries are more pronounced in the case of forecasting volatility.

Suggested Citation

  • Christina Christou & Rangan Gupta & Christis Hassapis & Tahir Suleman, 2018. "The role of economic uncertainty in forecasting exchange rate returns and realized volatility: Evidence from quantile predictive regressions," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 37(7), pages 705-719, November.
    • Handle: RePEc:wly:jforec:v:37:y:2018:i:7:p:705-719
    DOI: 10.1002/for.2539
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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