Forecasting Foreign Exchange Rate in Colombia Assuming PPP Conditions: Empirical Evidence Using VAR (in Spanish)

Estudios Gerenciales. Journal of Management and Economics of Iberoamerica, Vol. 25, No. 113, pp. 211-226, October-December 2009

17 Pages Posted: 20 Feb 2009 Last revised: 16 Feb 2010

See all articles by Catherine Fayad

Catherine Fayad

affiliation not provided to SSRN

Roberto Fortich

Universidad Tecnologica de Bolivar Department of Finance and International Business - Instituto de Estudios para el Desarrollo (IDE)

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: February 15, 2009

Abstract

In this paper we evaluate a set of colombian exchange rate forecasts during the 1995-2005 period, using a Purchasing Power of Parity Exchange Rate Model (PPPER). Our first finding is that the computed forecasts seem to validate the use of this model under certain conditions given that, theoretically, it does a good work in predicting the long-term behaviour of the nominal exchange rate. Our second finding included a comparison analysis of out-of-sample forecasts (saving the 2001-2005 historical data) between the PPP-based forecast models, and the Vector Autorregresive (VAR) ones. The VAR method has a better forecasting performance, according to the RMSE, MAE and U-Theil measures. However, MAPE results measured on the first and second month-ahead forecasts, indicate that the VAR model has the worst performance amongst PPP-based models.

Note: Downloadable document is in Spanish.

Keywords: Foreign exchange, time-series model, financial forecasting

JEL Classification: F31, C22, G17

Suggested Citation

Fayad, Catherine and Fortich, Roberto Carlos and Velez-Pareja, Ignacio, Forecasting Foreign Exchange Rate in Colombia Assuming PPP Conditions: Empirical Evidence Using VAR (in Spanish) (February 15, 2009). Estudios Gerenciales. Journal of Management and Economics of Iberoamerica, Vol. 25, No. 113, pp. 211-226, October-December 2009. Available at SSRN: https://ssrn.com/abstract=1343986 or http://dx.doi.org/10.2139/ssrn.1343986

Catherine Fayad

affiliation not provided to SSRN ( email )

Roberto Carlos Fortich (Contact Author)

Universidad Tecnologica de Bolivar Department of Finance and International Business - Instituto de Estudios para el Desarrollo (IDE) ( email )

Manga Cr 21 #25-92 Calle del Bouquet
Cartagena, Bolivar
Colombia
(5) 660 60 41 Ext. 491 (Phone)
(5) 660 43 17 (Fax)

HOME PAGE: http://www.unitecnologica.edu.co/finanzas/docentes

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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