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Forecasting and combining competing models of exchange rate determination
[journal article]
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... view more
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.... view less
Keywords
forecast procedure; rate of exchange
Classification
Economic Statistics, Econometrics, Business Informatics
Political Economy
Free Keywords
non-linearity; exchange rate modelling; forecasting
Document language
English
Publication Year
2008
Page/Pages
p. 3455-3480
Journal
Applied Economics, 42 (2008) 27
DOI
https://doi.org/10.1080/00036840802112505
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)