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Can the Markov switching model forecast exchange rates?

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  • Charles Engel

Abstract

A Markov-switching model is fit for eighteen exchange rates at quarterly and monthly frequencies. This model fits well in-sample at the quarterly frequency for many exchange rates. By the mean-squared-error or mean-absolute-error criterion. the Markov model does not generate superior forecasts at a random walk or at the forward rate. There appears to be some evidence that the forecast of the Markov model are superior at predicting the direction of change of the exchange rate.
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Suggested Citation

  • Charles Engel, 1991. "Can the Markov switching model forecast exchange rates?," Research Working Paper 91-04, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:91-04
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    References listed on IDEAS

    as
    1. Engel, Charles & Hamilton, James D, 1990. "Long Swings in the Dollar: Are They in the Data and Do Markets Know It?," American Economic Review, American Economic Association, vol. 80(4), pages 689-713, September.
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    7. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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    More about this item

    Keywords

    Foreign exchange rates; Forecasting;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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