IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/125996.html
   My bibliography  Save this paper

Penalized regression methods for exchange rate forecasting: evidence from the U.S. dollar index

Author

Listed:
  • Mir, Zulfiqar Ali

Abstract

This paper examines the effectiveness of penalized regression techniques in forecasting exchange rate movements. Using daily data for the U.S. Dollar Index (DXY) in 2016, we compare the performance of Ordinary Least Squares (OLS) with Ridge and Lasso regression models. The predictors include gold and silver returns, the S&P 500 Index, short- and long-term Treasury yields, and the EURUSD exchange rate. Results show that while OLS suffers from instability due to multicollinearity, Ridge regression improves coefficient stability and predictive accuracy. Lasso regression provides the best overall performance, with the highest explanatory power and the lowest prediction error, by selecting only the most relevant variables. These findings underscore the value of penalized regression in financial econometrics and highlight its potential for robust exchange rate forecasting.

Suggested Citation

  • Mir, Zulfiqar Ali, 2025. "Penalized regression methods for exchange rate forecasting: evidence from the U.S. dollar index," MPRA Paper 125996, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125996
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/125996/1/MPRA_paper_125996.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/126014/1/MPRA_paper_125996.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:125996. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.