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Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates

  • Zsolt Darvas
  • Zoltán Schepp

    ()

    (University of Pécs)

This paper shows that error correction models assuming that long-maturity forward rates are stationary outperform the random walk in out of sample forecasting at forecasting horizons mostly above one year, for US dollar exchange rates against nine industrial countries’ currencies, using the 1990-2006 period for evaluating the out of sample forecasts. The improvement in forecast accuracy of our models is economically significant for most of the exchange rate series, and statistically significant according to a bootstrap test. Our results are robust to the specification of the error correction model and to the underlying data frequency.

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File URL: http://web.uni-corvinus.hu/matkg/working_papers/wp_2007_5_darvas_schepp.pdf
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Paper provided by Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest in its series Working Papers with number 0705.

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Length: 47 pages
Date of creation: 18 May 2007
Date of revision:
Handle: RePEc:mkg:wpaper:0705
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