Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability

Abhay Abhyankar, Lucio Sarno () and Giorgio Valente ()

No 4365, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A major puzzle in international finance is the inability of models based on monetary fundamentals to produce better out-of-sample forecasts of the nominal exchange rate than a naive random walk. While prior research has generally evaluated exchange rate forecasts using conventional statistical measures of forecast accuracy, in this Paper we investigate whether there is any economic value to the predictive power of monetary fundamentals for the exchange rate. We estimate, using a framework that allows for parameter uncertainty, the economic and utility gains to an investor who manages a portfolio based on exchange rate forecasts from a monetary fundamentals model. In contrast to much previous research, we find that the economic value of the exchange rate forecasts implied by monetary fundamentals can be substantially greater than the economic value of forecasts obtained using a random walk across a range of horizons.

Keywords: forecasting; foreign exchange; monetary fundamentals; optimal portfolio; parameter uncertainty (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2004-04
View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP4365.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability (2004)
Journal Article: Exchange rates and fundamentals: evidence on the economic value of predictability (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:4365

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP4365.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().