Unpredictable after All? A Short Note on Exchange Rate Predictability

21 Pages Posted: 15 Oct 2009

See all articles by G. A. Moerman

G. A. Moerman

AEGON Asset Management; Erasmus University Rotterdam (EUR) - Department of Financial Management

Date Written: 21 2001 5,

Abstract

Earlier research has shown that it is very hard to outperform the random walk model with respect to forecasting exchange rates. In this paper we propose an extension to the regular regime-switching model in order to capture the exchange rate dynamics. The model is extended by including macro-economic variables, like inflation and interest rates, into both regimes. The regimes not only have different means and volatility's, but also different sensitivities to the macro-economic variables. We will show that this approach doesn't work over the whole sample, although previous research work might indicate otherwise. Furthermore we will elaborate on sub samples, in which the model showed a better performance than the random walk model, and show that this is rather coincidence.

Keywords: forecasting, econometrics, exchange rates, regime-switching model, economic variables

JEL Classification: M, G3, C53

Suggested Citation

Moerman, Gerard A., Unpredictable after All? A Short Note on Exchange Rate Predictability (21 2001 5,). ERIM Report Series Reference No. ERS-2001-29-F&A. Available at SSRN: https://ssrn.com/abstract=1489202

Gerard A. Moerman (Contact Author)

AEGON Asset Management ( email )

P.O. Box 202
2501 CE The Hague
Netherlands
+31 70 344 8318 (Phone)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

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