Abstract
This paper investigates the ability of a broad range of non-linear time series models to forecast the EUR/USD exchange rate. Using a variant of the well-known Dornbusch (Dornbusch, R. 1976. “Expectations and Exchange Rate Dynamics.” Journal of Political Economy 84: 1161–1176.) model to guide the specific choice of covariates, we find improvements over the random walk for all time horizons considered. While the improvement in forecasting accuracy is rather muted at the critical 1-month ahead horizon, accuracy increases seem to be more pronounced for longer-term forecasts. In addition, we account for model and specification uncertainty by applying several combination rules. Along this dimension our results suggest that we can still improve upon the single best performing model by a large extent.
Acknowledgments
Any views expressed in this paper represent those of the author only and not necessarily of the Oesterreichische Nationalbank or the Eurosystem. I would like to thank three anonymous referees, Jesus Crespo Cuaresma and Philipp Piribauer for helpful comments and suggestions.
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©2016 by De Gruyter
Artikel in diesem Heft
- Frontmatter
- Advances
- On the macroeconomic effects of heterogeneous productivity shocks
- Fiscal policy in an open economy
- Understanding entry and exit: a business cycle accounting approach
- Contributions
- Predicting US recessions with stock market illiquidity
- The corruption-inflation nexus: evidence from developed and developing countries
- Credit channel and capital flows: a macroprudential policy tool? Evidence from Turkey
- Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior
- Forecasting exchange rates using multivariate threshold models
- Firms’ operational costs, market entry and growth
- Commonalities and cross-country spillovers in macroeconomic-financial linkages
- Identifying conventional and unconventional monetary policy shocks: a latent threshold approach
Artikel in diesem Heft
- Frontmatter
- Advances
- On the macroeconomic effects of heterogeneous productivity shocks
- Fiscal policy in an open economy
- Understanding entry and exit: a business cycle accounting approach
- Contributions
- Predicting US recessions with stock market illiquidity
- The corruption-inflation nexus: evidence from developed and developing countries
- Credit channel and capital flows: a macroprudential policy tool? Evidence from Turkey
- Optimistic about the future? How uncertainty and expectations about future consumption prospects affect optimal consumer behavior
- Forecasting exchange rates using multivariate threshold models
- Firms’ operational costs, market entry and growth
- Commonalities and cross-country spillovers in macroeconomic-financial linkages
- Identifying conventional and unconventional monetary policy shocks: a latent threshold approach