Forecasting and combining competing models of exchange rate determination

Carlo Altavilla () and Paul De Grauwe

Open Access publications from Katholieke Universiteit Leuven from Katholieke Universiteit Leuven

Abstract: This article 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 the 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.

Date: 2010
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Published in Applied Economics (2010) v.42, p.3455-3480

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Related works:
Journal Article: Forecasting and combining competing models of exchange rate determination (2010)
Working Paper: Forecasting and combining competing models of exchange rate determination (2010)
Working Paper: Forecasting and Combining Competing Models of Exchange Rate Determination (2006)
Working Paper: Forecasting and combining competing models of exchange rate determination (2006)
Working Paper: Forecasting and Combining Competing Models of Exchange rate Determination (2006)
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