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Long; Horizon Exchange Rate Predictability?

Author

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  • Lorenzo Giorgianni
  • Jeremy Berkowitz

Abstract

Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. By considering the implied vector error-correction model, we show that little is to be gained from estimating such regressions for horizons greater than one time period. We also show that in small to medium samples the long-horizon procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates, diagnostic statistics and graphical evidence incorrectly suggest a high degree of predictability of the dependent variable.

Suggested Citation

  • Lorenzo Giorgianni & Jeremy Berkowitz, 1997. "Long; Horizon Exchange Rate Predictability?," IMF Working Papers 97/6, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:97/6
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    Cited by:

    1. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February.
    2. Taniya Ghosh & Soumya Bhadury, 2017. "Money's Causal Role in Exchange Rate: Do Divisia Monetary Aggregates Explain More?," Working Papers id:12107, eSocialSciences.
    3. Nelson Mark, 1998. "Fundamentals of the Real Dollar-Pound Rate: 1871-1994," Working Papers 98-14, Ohio State University, Department of Economics.
    4. Ahmad Zubaidi Baharumshah & Liew Khim Sen, 2003. "The Predictability of ASEAN-5 Exchange Rates," International Finance 0307004, EconWPA.
    5. Kilian, Lutz, 1999. "Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 491-510, Sept.-Oct.
    6. W A Razzak & Thomas Grennes, 1998. "The long-run nominal exchange rate: specification and estimation issues," Reserve Bank of New Zealand Discussion Paper Series G98/5, Reserve Bank of New Zealand.

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