Forecasting and Combining Competing Models of Exchange Rate Determination

Carlo Altavilla () and Paul De Grauwe ()

No CESifo Working Paper No. 1747, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and its underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.

Keywords: non-linearity; exchange rate modelling; forecasting (search for similar items in EconPapers)
JEL-codes: C53 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fmk, nep-for, nep-ifn and nep-mon
Date: 2006
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Working Paper: Forecasting and Combining Competing Models of Exchange rate Determination (2006)
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