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The Continuing Puzzle of Short Horizon Exchange Rate Forecasting

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  • Kenneth S. Rogoff
  • Vania Stavrakeva

Abstract

Are structural models getting closer to being able to forecast exchange rates at short horizons? Here we argue that misinterpretation of some new out-of-sample tests for nested models, over-reliance on asymptotic test statistics, and failure to sufficiently check robustness to alternative time windows have led many studies to overstate even the relatively thin positive results that have been found. We find that by allowing for common cross-country shocks in our panel forecasting specification, we are able to generate some improvement, but even that improvement is not entirely robust to the forecast window, and much of the gain appears to come from non-structural rather than structural factors.

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  • Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14071
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    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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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