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Forecasting and combining competing models of exchange rate determination


Altavilla, Carlo; Grauwe, Paul de


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Abstract This paper investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and its underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.
Thesaurusschlagwörter rate of exchange; forecast procedure
Klassifikation Volkswirtschaftslehre; Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Freie Schlagwörter non-linearity; exchange rate modelling; forecasting
Sprache Dokument Englisch
Publikationsjahr 2008
Seitenangabe S. 3455-3480
Zeitschriftentitel Applied Economics, 42 (2008) 27
DOI http://dx.doi.org/10.1080/00036840802112505
Status Postprint; begutachtet (peer reviewed)
Lizenz PEER Licence Agreement (applicable only to documents from PEER project)