Forecasting the Dollar/Euro Exchange Rate: Are International Parities Useful?

FEDEA Working Paper No. 2003-15

14 Pages Posted: 31 Jul 2003  

Simon Sosvilla-Rivero

Complutense Institute for International Studies

Emma Garcia

Foundation for Applied Economic Research (FEDEA)

Date Written: June 2003

Abstract

In this paper we assess the empirical relevance of an expectations version of purchasing power parity in forecasting the Dollar/Euro exchange rate. This version is based on the differential of inflation expectations derived from inflation-indexed bonds for the Euro area and the USA.

Using the longest daily data a for both the Dollar/Euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecast.

Keywords: Forecasting, Purchasing Power Parity, Exchange rates

JEL Classification: C53, F31

Suggested Citation

Sosvilla-Rivero, Simon and Garcia, Emma, Forecasting the Dollar/Euro Exchange Rate: Are International Parities Useful? (June 2003). FEDEA Working Paper No. 2003-15. Available at SSRN: https://ssrn.com/abstract=421880 or http://dx.doi.org/10.2139/ssrn.421880

Simon Sosvilla-Rivero (Contact Author)

Complutense Institute for International Studies ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Emma Garcia

Foundation for Applied Economic Research (FEDEA) ( email )

Jorge Juan 46
Madrid, 28001
Spain

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