Short-run forecasting of the euro-dollar exchange rate with economic fundamentals

Maximo Camacho, Marcos Dal Bianco and Gabriel Perez Quiros

No 1201, Working Papers from BBVA Bank, Economic Research Department

Abstract: We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one-week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random-walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model obtains a great improvement when we use the direction of change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down, with statistically significant improvements.

Keywords: Exchange rate forecasting; State-space model; Mixed frequencies; Euro-dollar rate (search for similar items in EconPapers)
JEL-codes: C01 C22 F31 F37 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for and nep-mon
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Citations: View citations in EconPapers (40)

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Related works:
Journal Article: Short-run forecasting of the euro-dollar exchange rate with economic fundamentals (2012)
Working Paper: Short-run forecasting of the euro-dollar exchange rate with economic fundamentals (2012)
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