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Forecasting the Dollar/Euro Exchange Rate: Can International Parities Help?

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  • Simón Sosvilla-Rivero
  • Emma García

Abstract

In this paper we assess the empirical relevance of an expectations version of Purchasing Power Parity in forecasting the Dollar/Euro exchange rate. This version is based on the Uncovered Interest Rate Parity and tbe Fisher Hypothesis, and it makes use of the differentials of inflation expectations derived from inflation-indexed bonds for the Euro area and the USA. Using the longest available daily data for both the Dollar/Euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecast.

Suggested Citation

  • Simón Sosvilla-Rivero & Emma García, "undated". "Forecasting the Dollar/Euro Exchange Rate: Can International Parities Help?," Working Papers 2003-15, FEDEA.
    • Handle: RePEc:fda:fdaddt:2003-15
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