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Understanding forecast failure in ESTAR models of real exchange rates

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  • Buncic, Daniel

Abstract

The forecast performance of the empirical ESTAR model of Taylor et al. (2001) is examined for 4 bilateral real exchange rate series over an out-of-sample evaluation period of nearly 12 years. Point as well as density forecasts are evaluated relative to a simple AR(1) specification, considering horizons up to 22 steps head. The results of this study suggest that no forecast gains over a simple AR(1) model exist at any of the forecast horizons that are considered, regardless of whether point or density forecasts are used. Using simulation and non-parametric techniques in conjunction with graphical methods, this study shows that the non-linearity in the point forecasts of the ESTAR model decrease as the forecast horizon increases. Multiple steps ahead density forecasts of the ESTAR model are approximately normal looking, with no signs of skewness or bimodality. For an applied forecaster, there do not appear to exist any gains in using the non-linear ESTAR model over a simple AR(1) specification.

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  • Buncic, Daniel, 2009. "Understanding forecast failure in ESTAR models of real exchange rates," MPRA Paper 13121, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13121
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    Cited by:

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    2. Addo, Peter Martey & Billio, Monica & Guégan, Dominique, 2014. "The univariate MT-STAR model and a new linearity and unit root test procedure," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 4-19.
    3. Peter Martey Addo & Monica Billio & Dominique Guegan, 2013. "Understanding Exchange Rates Dynamics," Documents de travail du Centre d'Economie de la Sorbonne 13023, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Buncic, Daniel & Melecky, Martin, 2013. "Macroprudential stress testing of credit risk: A practical approach for policy makers," Journal of Financial Stability, Elsevier, vol. 9(3), pages 347-370.
    5. Buncic, Daniel & Melecky, Martin, 2014. "Equilibrium credit: The reference point for macroprudential supervisors," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 135-154.
    6. Peter Martey Addo & Monica Billio & Dominique Guegan, 2011. "A test for a new modelling : The Univariate MT-STAR Model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00659158, HAL.
    7. Daniel Buncic, 2019. "Identification and Estimation Issues in Exponential Smooth Transition Autoregressive Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(3), pages 667-685, June.
    8. Buncic, Daniel & Piras, Gion Donat, 2016. "Heterogeneous agents, the financial crisis and exchange rate predictability," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 313-359.
    9. Buncic, Daniel & Moretto, Carlo, 2015. "Forecasting copper prices with dynamic averaging and selection models," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 1-38.
    10. Peter Martey Addo & Monica Billio & Dominique Guegan, 2011. "A New Modelling Test: The Univariate MT-STAR Model," Documents de travail du Centre d'Economie de la Sorbonne 11083r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Aug 2013.
    11. Corina SAMAN, 2015. "Out-Of-Sample Forecasting Performance Of A Robust Neural Exchange Rate Model Of Ron/Usd," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 93-106, March.

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    More about this item

    Keywords

    Purchasing power parity; regime modelling; non-linear real exchange rate models; ESTAR; forecast evaluation; density forecasts; non-parametric methods;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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