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Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates

Author

Listed:
  • Zsolt Darvas
  • Zoltán Schepp

    () (University of Pécs)

Abstract

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.

Suggested Citation

  • Zsolt Darvas & Zoltán Schepp, 2007. "Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates," Working Papers 0705, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
  • Handle: RePEc:mkg:wpaper:0705
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    References listed on IDEAS

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    Cited by:

    1. Ábel, István & Kóbor, Ádám, 2008. "Kamatkülönbözet, spekulációs profit és árfolyam-változékonyság
      [Interest-rate differentials, speculative capital flows and exchange-rate volatility]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 941-961.
    2. Darvas, Zsolt & Schepp, Zoltán, 2007. "Kelet-közép-európai devizaárfolyamok előrejelzése határidős árfolyamok segítségével
      [Forecasting the exchange rates of three Central-Eastern European currencies with forward exchange rates]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 501-528.

    More about this item

    Keywords

    bootstrap; forecasting performance; out of sample; random walk; VECM;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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