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Why is it so difficult to beat the random walk forecast of exchange rates?

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Kilian, Lutz and Taylor, Mark P. (2003) Why is it so difficult to beat the random walk forecast of exchange rates? In: Conference on Empirical Exchange Rate Models, Madison, Wisconsin, US, 28-29 Sep 2001. Published in: Journal of International Economics, 60 (1). pp. 85-107. ISSN 0022-1996. doi:10.1016/S0022-1996(02)00060-0

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Official URL: http://dx.doi.org/10.1016/S0022-1996(02)00060-0

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Abstract

Recent empirical evidence suggests that the time series behavior of the real exchange rate is well approximated by a nonlinear, exponential smooth transition autoregressive (ESTAR) model. This nonlinearity helps resolve a number of puzzles concerning the persistence and volatility of real exchange rates. In this paper, we explore whether it may also help resolve the well-known difficulties of exchange rate forecasting. We develop a bootstrap test of the random walk hypothesis of the nominal exchange rate, given ESTAR real exchange rate dynamics. We find strong evidence of predictability at horizons of 2 to 3 years, but not at shorter 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: 2003
Dates:
DateEvent
2003Published
Volume: 60
Number: 1
Number of Pages: 23
Page Range: pp. 85-107
DOI: 10.1016/S0022-1996(02)00060-0
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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