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

Marcos Dal Bianco, Maximo Camacho and Gabriel Perez-Quiros ()
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Gabriel Perez-Quiros: Banco de España
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

No 1203, Working Papers from Banco de España

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 outof-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 improves greatly 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 has an equal chance to go up or down, with statistically significant improvements.

Keywords: euro-dollar rate; exchange rate forecasting; State-space model; mixed frequencies (search for similar items in EconPapers)
JEL-codes: C01 C22 F31 F37 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-02
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 (38)

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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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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1203

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