IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpge/0308001.html
   My bibliography  Save this paper

Forecasting Performance of Logistic STAR Exchange Rate Model: The Original and Reparameterised Versions

Author

Listed:
  • Liew Khim Sen

    (Universiti Putra Malaysia)

  • Ahmad Zubaidi Baharumshah

    (Universiti Putra Malaysia)

Abstract

Exponential Smooth Transition Autoregressive (ESTAR) model is widely adopted in the exchange rate study as its symmetrical distribution matches that of the symmetrical exchange rate adjustment behaviour. In contrast, another specification of STAR model, namely the LSTAR (logistic STAR) model is discarded by most researchers in priori in their exchange rate modeling exercises due to its undesired property of being asymmetry. This study is the first of its kind in examining the validity of this hypothesis that the ESTAR exchange rate model is superior to LSTAR exchange rate model on the basis of forecasting accuracy. Based on the experience of the adjustment process of two nominal exchange rates, we find that the hypothesis is merely theoretical since we fail to provide consistent empirical evidence in favour of the null hypothesis. This warrants us that we need not be too pessimistic on the usage of LSTAR model in exchange rate study. In our effort to rekindle the usage of LSTAR model, we further reparameterized the original version into the so-called absolute version, which has symmetrical distribution properties, in accordance with the well-known symmetrical adjustment process of exchange rate. The resulting ALSTAR model has proven to be a more promising model in the sense that it has improved significantly from its original version as well as the ESTAR model, which has thus far been deemed the most appropriate nonlinear exchange rate model.

Suggested Citation

  • Liew Khim Sen & Ahmad Zubaidi Baharumshah, 2003. "Forecasting Performance of Logistic STAR Exchange Rate Model: The Original and Reparameterised Versions," GE, Growth, Math methods 0308001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpge:0308001
    Note: Type of Document -
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/ge/papers/0308/0308001.pdf
    Download Restriction: no

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/ge/papers/0308/0308001.ps.gz
    Download Restriction: no

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/ge/papers/0308/0308001.doc.gz
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Álvaro Escribano & Oscar Jordá, 2001. "Testing nonlinearity: Decision rules for selecting between logistic and exponential STAR models," Spanish Economic Review, Springer;Spanish Economic Association, vol. 3(3), pages 193-209.
    2. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 119-136, Suppl. De.
    3. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-948, September.
    4. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
    5. Pesaran, M Hashem & Potter, Simon M, 1992. "Nonlinear Dynamics and Econometrics: An Introduction," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 1-7, Suppl. De.
    6. Baum, Christopher F. & Barkoulas, John T. & Caglayan, Mustafa, 2001. "Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 379-399, June.
    7. Venus Khim-Sen Liew & Ahmad Zubaidi Baharumshahb & Evan Laub, 2004. "Nonlinear Adjustment towards Purchasing Power Parity in ASEAN Exchange Rates," The IUP Journal of Applied Economics, IUP Publications, vol. 0(6), pages 7-18, November.
    8. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. McMillan, David G., 2009. "The confusing time-series behaviour of real exchange rates: Are asymmetries important?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 692-711, October.
    2. Lin, Jeng-Bau & Liang, Chin-Chia & Yeh, Ming-Liang, 2011. "Examining nonlinear dynamics of exchange rates and forecasting performance based on the exchange rate parity of four Asian economies," Japan and the World Economy, Elsevier, vol. 23(2), pages 79-85, March.
    3. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2006. "Purchasing Power Parity: The Irish Experience Re-visited," Trinity Economics Papers tep200615, Trinity College Dublin, Department of Economics.

    More about this item

    Keywords

    LSTAR; ESTAR; forecasting accuracy; nonlinear; exchange rate;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    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:wpa:wuwpge:0308001. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.