On the Sources of Uncertainty in Exchange Rate Predictability

Joseph Byrne, Dimitris Korobilis and Pinho Ribeiro

Working Papers from Business School - Economics, University of Glasgow

Abstract: We analyse the role of time-variation in coe¢ cients and other sources of un- certainty in exchange rate forecasting regressions. Our techniques incorporate the notion that the relevant set of predictors and their corresponding weights, change over time. We Önd that predictive models which allow for sudden, rather than smooth, changes in coe¢ cients signiÖcantly beat the random walk benchmark in out-of-sample forecasting exercise. Using an innovative variance decomposition scheme, we identify uncertainty in coe¢ cientsíestimation and uncertainty about the precise degree of coe¢ cientsívariability, as the main fac- tors hindering modelsíforecasting performance. The uncertainty regarding the choice of the predictor is small.

Keywords: Instabilities; Exchange Rate Forecasting; Time-Varying Parameter Models; Bayesian Model Averaging; Forecast Combination; Financial Condi- tion Indexes; Bootstrap (search for similar items in EconPapers)
JEL-codes: C53 C55 E44 F37 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: ON THE SOURCES OF UNCERTAINTY IN EXCHANGE RATE PREDICTABILITY (2018)
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014)
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2014_16

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