Comparing Forecast Performance of Exchange Rate Models

23 Pages Posted: 21 Jan 2009

See all articles by Lillie Lam

Lillie Lam

Laurence Fung

Hong Kong Monetary Authority

Ip-wing Yu

Hong Kong Monetary Authority

Date Written: June 2008

Abstract

Exchange-rate movement is regularly monitored by central banks for macroeconomic analysis and market surveillance purposes. Notwithstanding the pioneering study of Meese and Rogoff (1983), which shows the superiority of the random-walk model in out-of-sample exchange-rate forecast, there is some evidence that exchange-rate movement may be predictable at longer time horizons. This study compares the forecast performance of the Purchasing Power Parity model, Uncovered Interest Rate Party model, Sticky Price Monetary model, the model based on the Bayesian Model Averaging technique, and a combined forecast of all the above models with benchmarks given by the random-walk model and the historical average return. Empirical results suggest that the combined forecast outperforms the benchmarks and generally yields better results than relying on a single model.

Keywords: Bayesian Analysis, Model Evaluatin and Selection, Forecasting and Other Model Application

JEL Classification: C11, C52, C53

Suggested Citation

Lam, Lillie and Fung, Kang-por and Yu, Ip-wing, Comparing Forecast Performance of Exchange Rate Models (June 2008). Available at SSRN: https://ssrn.com/abstract=1330705 or http://dx.doi.org/10.2139/ssrn.1330705

Kang-por Fung (Contact Author)

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
8 Finance Street, Central
Hong Kong
Hong Kong

Ip-wing Yu

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

No contact information is available for Lillie Lam

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