Exchange Rate Predictability
Author | : Barbara Rossi |
Publisher | : |
Total Pages | : 74 |
Release | : 2013 |
ISBN-10 | : OCLC:854624449 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Exchange Rate Predictability written by Barbara Rossi and published by . This book was released on 2013 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: The main goal of this article is to provide an answer to the question: "Does anything forecast exchange rates, and if so, which variables?". It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends" on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift.