Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates

Corvinus University of Budapest, Mathematical Economics and Economic Analysis Working Paper No. 2007/5

49 Pages Posted: 22 May 2007

See all articles by Zsolt Darvas

Zsolt Darvas

Budapest University of Economic Sciences and Public Administration

Zoltán Schepp

University of Pecs

Date Written: May 18, 2007

Abstract

This paper shows that error correction models assuming that long-maturity forward rates are stationary outperform the random walk in out of sample forecasting at forecasting horizons mostly above one year, for US dollar exchange rates against nine industrial countries' currencies, using the 1990-2006 period for evaluating the out of sample forecasts. The improvement in forecast accuracy of our models is economically significant for most of the exchange rate series, and statistically significant according to a bootstrap test. Our results are robust to the specification of the error correction model and to the underlying data frequency.

Keywords: bootstrap, forecasting performance, out of sample, random walk, VECM

JEL Classification: E43, F31, F47

Suggested Citation

Darvas, Zsolt and Schepp, Zoltán, Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates (May 18, 2007). Corvinus University of Budapest, Mathematical Economics and Economic Analysis Working Paper No. 2007/5, Available at SSRN: https://ssrn.com/abstract=987797 or http://dx.doi.org/10.2139/ssrn.987797

Zsolt Darvas (Contact Author)

Budapest University of Economic Sciences and Public Administration ( email )

Budapest H-1093
Hungary

HOME PAGE: http://www.uni-corvinus.hu/darvas

Zoltán Schepp

University of Pecs ( email )

Rakoczi 80
Pecs, 7622
Hungary

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