Long-Horizon Exchange Rate Predictability

Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series 96-39

Posted: 17 Oct 1996

See all articles by Jeremy Berkowitz

Jeremy Berkowitz

University of Houston - Department of Finance

Lorenzo Giorgianni

International Monetary Fund (IMF)

Date Written: September 17, 1996

Abstract

Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. We show that such a procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates and diagnostic statistics suggest a high degree of predictability of the dependent variable. We apply a simple modification of the long-horizon regression due to Jegadeesh (1991), which may provide more accurate inference for researchers interested in comparing short and long-run predictability of U.S. dollar exchange rates.

JEL Classification: C13, C22, F31

Suggested Citation

Berkowitz, Jeremy and Giorgianni, Lorenzo, Long-Horizon Exchange Rate Predictability (September 17, 1996). Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series 96-39, Available at SSRN: https://ssrn.com/abstract=4336

Jeremy Berkowitz (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Lorenzo Giorgianni

International Monetary Fund (IMF) ( email )

700 19th Street NW
Asia and Pacific Department
Washington, DC 20431
United States
202-623-5326 (Phone)

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