Exchange Rate Predictability in a Changing World

70 Pages Posted: 16 Feb 2014 Last revised: 29 Sep 2014

See all articles by Joseph Byrne

Joseph Byrne

Heriot-Watt University - Department of Accountancy, Economics and Finance

Dimitris Korobilis

University of Glasgow - Adam Smith Business School

Pinho Ribeiro

University of Glasgow - Adam Smith Business School

Date Written: February 14, 2014

Abstract

An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.

Suggested Citation

Byrne, Joseph and Korobilis, Dimitris and Ribeiro, Pinho, Exchange Rate Predictability in a Changing World (February 14, 2014). Available at SSRN: https://ssrn.com/abstract=2396138 or http://dx.doi.org/10.2139/ssrn.2396138

Joseph Byrne

Heriot-Watt University - Department of Accountancy, Economics and Finance ( email )

Scotland
United Kingdom

Dimitris Korobilis (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

40 University Avenue
Gilbert Scott Building
Glasgow, Scotland G12 8QQ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/dimitriskorobilis/

Pinho Ribeiro

University of Glasgow - Adam Smith Business School ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

HOME PAGE: http://www.sites.google.com/site/pinhojribeiro/research

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