Exchange Rate Predictability and Dynamic Bayesian Learning

59 Pages Posted: 15 Nov 2018 Last revised: 1 Aug 2019

See all articles by Joscha Beckmann

Joscha Beckmann

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

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Dimitris Korobilis

University of Glasgow - Adam Smith Business School

Rainer Alexander Schüssler

University of Rostock - Department of Economics

Date Written: July 29, 2019

Abstract

This paper considers how an investor in the foreign exchange market can exploit predictive information by means of flexible Bayesian inference. Using a variety of different vector autoregressive models, the investor is able, each period, to revise past predictive mistakes and learn about important data features. The proposed methodology is developed in order to synthesize a wide array of established approaches for modelling exchange rate dynamics. In a thorough investigation of monthly exchange rate predictability for ten countries, we find that an investor using the proposed flexible methodology for dynamic asset allocation achieves significant economic gains out of sample relative to benchmark strategies. In particular, we find strong evidence for sparsity, fast model switching and exploiting the exchange rate cross-section.

Keywords: Exchange Rates, Bayesian Vector Autoregression, Forecasting, Dynamic Portfolio Allocation, Economic Fundamentals

JEL Classification: C11, G11, G12, G15, G17, F31

Suggested Citation

Beckmann, Joscha and Koop, Gary and Korobilis, Dimitris and Schüssler, Rainer Alexander, Exchange Rate Predictability and Dynamic Bayesian Learning (July 29, 2019). Available at SSRN: https://ssrn.com/abstract=3271970 or http://dx.doi.org/10.2139/ssrn.3271970

Joscha Beckmann

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

Universitätsstr. 9
Essen, 45141
Germany

Gary Koop (Contact Author)

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

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/

Rainer Alexander Schüssler

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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