Forecasting Exchange Rates under Parameter and Model Uncertainty

46 Pages Posted: 29 Sep 2014 Last revised: 9 Dec 2015

See all articles by Joscha Beckmann

Joscha Beckmann

University of Duisburg-Essen - Department of Economics and Business Administration

Rainer Alexander Schüssler

University of Rostock - Department of Economics

Date Written: September 25, 2014

Abstract

We introduce a forecasting method that closely matches the econometric properties required by the theory of exchange rate prediction. Our approach formally models (i) when (and if) predictor variables enter or leave a regression model, (ii) the degree of parameter instability, (iii) the (potentially) rapidly changing relevance of regressors, and (iv) the appropriate shrinkage intensity over time. We consider (short-term) forecasting of six major US dollar exchange rates using a standard set of macro fundamentals. Our results indicate the importance of shrinkage and flexible model selection criteria to avoid poor forecasting results.

Keywords: Shrinkage; Time-varying parameter models; Exchange rate forecasting

JEL Classification: F31, F37, G17

Suggested Citation

Beckmann, Joscha and Schüssler, Rainer Alexander, Forecasting Exchange Rates under Parameter and Model Uncertainty (September 25, 2014). Journal of International Money and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2502382 or http://dx.doi.org/10.2139/ssrn.2502382

Joscha Beckmann

University of Duisburg-Essen - Department of Economics and Business Administration ( email )

Universitätsstr. 9
Essen, 45141
Germany

Rainer Alexander Schüssler (Contact Author)

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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