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Statistical and economic methods for evaluating exchange rate predictability
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Della Corte, Pasquale and Tsiakas, Ilias (2012) Statistical and economic methods for evaluating exchange rate predictability. In: James, J. and Sarno, Lucio and Marsh, I.W., (eds.) Handbook of exchange rates. Wiley Handbooks in Financial Engineering and Econometrics (Chapter 8). Wiley-Blackwell Publishing Ltd., pp. 239-283. ISBN 978-0-470-76883-9
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Abstract
This chapter provides a comprehensive review of the statistical and economic methods used for evaluating out-of-sample exchange rate predictability. We illustrate these methods by assessing the forecasting performance of a set of widely used empirical exchange rate models using
monthly returns on nine major US dollar exchange rates. We Önd that empirical models based on uncovered interest parity, purchasing power parity and the asymmetric Taylor rule perform better than the random walk in out-of-sample forecasting using both statistical and economic
criteria. We also conÖrm that conditioning on monetary fundamentals does not generate out-ofsample economic value. Finally, combined forecasts formed using a variety of model averaging methods perform better than individual empirical models. These results are robust to reasonably high transaction costs, the choice of numeraire and the exclusion of any one currency from the investment opportunity set.
| Item Type: | Book Item | ||||
|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HA Statistics | ||||
| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Series Name: | Wiley Handbooks in Financial Engineering and Econometrics | ||||
| Publisher: | Wiley-Blackwell Publishing Ltd. | ||||
| ISBN: | 978-0-470-76883-9 | ||||
| Book Title: | Handbook of exchange rates | ||||
| Editor: | James, J. and Sarno, Lucio and Marsh, I.W. | ||||
| Official Date: | 2012 | ||||
| Dates: |
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| Number: | Chapter 8 | ||||
| Number of Pages: | 45 | ||||
| Page Range: | pp. 239-283 | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access |
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