A Note on Long Horizon Forecasts of Nonlinear Models of Real Exchange Rates: Comments on Rapach and Wohar (2006)

Daniel Buncic ()

No 2008-02, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We show that long horizon forecasts from the nonlinear models that are considered in the study by Rapach and Wohar (2006) cannot generate any forecast gains over a simple AR(1) specification. This is contrary to the findings reported in Rapach and Wohar (2006). Moreover, we illustrate graphically that the nonlinearity in the forecasts from the ESTAR model is the strongest when forecasting one step-ahead and that it diminishes as the forecast horizon increases. There exists, therefore, no potential whatsoever for the considered nonlinear models to outperform linear ones when forecasting far ahead. We also illustrate graphically why one step-ahead forecasts from the nonlinear ESTAR model fail to yield superior predictions to a simple AR(1).

Keywords: PPP; regime modelling; nonlinear real exchange rate models; ESTAR; forecast evaluation (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 F31 F47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-ifn
Date: 2008-02
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Working Paper: A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006) (2008)
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