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The out-of-sample success of term structure models as exchange rate predictors : a step beyond

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Clarida, Richard H., Sarno, Lucio, Taylor, Mark P. and Valente, Giorgio (2001) The out-of-sample success of term structure models as exchange rate predictors : a step beyond. In: Conference on Empirical Exchange Rate Models, Madison, Wisconsin, US, 28-29 Sep 2001. Published in: Journal of International Economics, 60 (1). pp. 61-83. ISSN 0022-1996. doi:10.1016/S0022-1996(02)00059-4

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Official URL: http://dx.doi.org/10.1016/S0022-1996(02)00059-4

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Abstract

A large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate. However, there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities. This paper proposes a term-structure forecasting model of exchange rates based on a regime-switching vector equilibrium correction model which is novel in this context. Our model significantly outperforms both a random walk and, to a lesser extent, a linear term-structure vector equilibrium correction model for four major dollar rates across a range of horizons. (C) 2002 Elsevier Science B.V. All rights reserved.

Item Type: Conference Item (Paper)
Subjects: H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Warwick Business School
Journal or Publication Title: Journal of International Economics
Publisher: Elsevier BV
ISSN: 0022-1996
Official Date: 2001
Dates:
DateEvent
2001Published
Volume: 60
Number: 1
Number of Pages: 23
Page Range: pp. 61-83
DOI: 10.1016/S0022-1996(02)00059-4
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Conference Paper Type: Paper
Title of Event: Conference on Empirical Exchange Rate Models
Type of Event: Conference
Location of Event: Madison, Wisconsin, US
Date(s) of Event: 28-29 Sep 2001

Data sourced from Thomson Reuters' Web of Knowledge

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