Abstract

https://ssrn.com/abstract=2801984
 


 



Point, Interval and Density Forecasts of Exchange Rates with Time-Varying Parameter Models


Angela Abbate


Deutsche Bundesbank

Massimiliano Giuseppe Marcellino


European University Institute; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

2016

Bundesbank Discussion Paper No. 19/2016

Abstract:     
We explore whether modelling parameter time variation improves the point, interval and density forecasts of nine major exchange rates vis-a-vis the US dollar over the period 1976-2015. We find that modelling parameter time variation is needed for an accurate calibration of forecast confidence intervals, and is better suited at long horizons and in high-volatility periods. The biggest forecast improvements are obtained by modelling time variation in the volatilities of the innovations, rather than in the slope parameters. Moreover, we do not find evidence that parameter time variation helps to unravel exchange rate predictability by macroeconomic fundamentals. Finally, an economic evaluation of the different forecast models reveals that controlling for parameter time variation leads to higher portfolios returns, and to higher utility values for investors.

Number of Pages in PDF File: 34

Keywords: exchange rates, forecasting, density forecasts, BVAR, time-varying parameters

JEL Classification: C11, C53, F31, F37


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Date posted: June 29, 2016  

Suggested Citation

Abbate, Angela and Marcellino, Massimiliano Giuseppe, Point, Interval and Density Forecasts of Exchange Rates with Time-Varying Parameter Models (2016). Bundesbank Discussion Paper No. 19/2016. Available at SSRN: https://ssrn.com/abstract=2801984

Contact Information

Angela Abbate (Contact Author)
Deutsche Bundesbank ( email )
Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main, DE Germany 60316
Germany
Massimiliano Marcellino
European University Institute ( email )
Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy
European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )
Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy
Bocconi University - Department of Economics ( email )
Via Gobbi 5
Milan, 20136
Italy
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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