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Short-run forecasting of the euro-dollar exchange rate with economic fundamentals

  • Marcos dal Bianco

    (BBVA Research)

  • Maximo Camacho

    (Universidad de Murcia)

  • Gabriel Perez-Quiros

    ()

    (Banco de España)

We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging outof-sample forecasting results at horizons ranging from one week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model improves greatly when we use the direction-of-change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate has an equal chance to go up or down, with statistically significant improvements.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/12/Fich/dt1203e.pdf
File Function: First version, february 2012
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Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1203.

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Length: 41 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:bde:wpaper:1203
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