Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates
Budapest University of Economic Sciences and Public Administration
University of Pecs
May 18, 2007
Corvinus University of Budapest, Mathematical Economics and Economic Analysis Working Paper No. 2007/5
This paper shows that error correction models assuming that long-maturity forward rates are stationary outperform the random walk in out of sample forecasting at forecasting horizons mostly above one year, for US dollar exchange rates against nine industrial countries' currencies, using the 1990-2006 period for evaluating the out of sample forecasts. The improvement in forecast accuracy of our models is economically significant for most of the exchange rate series, and statistically significant according to a bootstrap test. Our results are robust to the specification of the error correction model and to the underlying data frequency.
Number of Pages in PDF File: 49
Keywords: bootstrap, forecasting performance, out of sample, random walk, VECM
JEL Classification: E43, F31, F47working papers series
Date posted: May 22, 2007
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