Long-Horizon Exchange Rate Predictability
Board of Governors of the Federal Reserve System Finance and Econ. Disc. Series 96-39
Posted: 17 Oct 1996
Date Written: September 17, 1996
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: Suggested Citation