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Forecasting Exchange Rates Out-of-Sample with Panel Methods and Real-Time Data

  • Onur Ince

This paper evaluates out-of-sample exchange rate forecasting with Purchasing Power Parity (PPP) and Taylor rule fundamentals for 9 OECD countries vis-à-vis the U.S. dollar over the period from 1973:Q1 to 2009:Q1 at short and long horizons. In contrast with previous work, which reports “forecasts” using revised data, I construct a quarterly real-time dataset that incorporates only the information available to market participants when the forecasts are made. Using bootstrapped out-of-sample test statistics, the exchange rate model with Taylor rule fundamentals performs better at the one-quarter horizon and panel estimation is not able to improve its performance. The PPP model, however, forecasts better at the 16-quarter horizon and its performance increases in panel framework. The results are in accord with previous research on long-run PPP and Taylor rule models. Key Words: Exchange Rate Forecasting, Taylor Rules, Real-Time Data, Out-of-Sample Test Statistics

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File URL: http://econ.appstate.edu/RePEc/pdf/wp1304.pdf
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Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 13-04.

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Date of creation: 2013
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Handle: RePEc:apl:wpaper:13-04
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