On the Sources of Uncertainty in Exchange Rate Predictability

29 Pages Posted: 20 Feb 2018

See all articles by Joseph Byrne

Joseph Byrne

Belmont University

Dimitris Korobilis

University of Glasgow - Adam Smith Business School

Pinho Ribeiro

University of Glasgow - Adam Smith Business School

Date Written: February 2018

Abstract

In a unified framework, we examine four sources of uncertainty in exchange rate forecasting models: (i) random variations in the data, (ii) estimation uncertainty, (iii) uncertainty about the degree of time variation in coefficients, and (iv) uncertainty regarding the choice of the predictor. We find that models that embed a high degree of coefficient variability yield forecast improvements at horizons beyond one month. At the one‐month horizon, and apart from the standard variance implied by unpredictable fluctuations in the data, the second and third sources of uncertainty listed above are key obstructions to predictive ability. The uncertainty regarding the choice of the predictors is negligible.

Suggested Citation

Byrne, Joseph and Korobilis, Dimitris and Ribeiro, Pinho, On the Sources of Uncertainty in Exchange Rate Predictability (February 2018). International Economic Review, Vol. 59, Issue 1, pp. 329-357, 2018. Available at SSRN: https://ssrn.com/abstract=3125193 or http://dx.doi.org/10.1111/iere.12271

Joseph Byrne (Contact Author)

Belmont University ( email )

1900 Belmont Blvd.
Nashville, TN 37212-3757
United States

Dimitris Korobilis

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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