Exchange rates and Fundamentals: What Do We Learn From Long-Horizon Regressions?

Lutz Kilian

Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: Long-horizon regression tests are widely used in empirical finance, despite evidence of severe size distortions. I propose a new bootstrap method for small-sample inference in long-horizon regressions. A Monte Carlo study shows that this bootstrap test greatly reduces the size distortions of conventional long-horizon regression tests. I also find that long-horizon regression tests do not have power advantages against economically plausible alternatives. The apparent lack of higher power at long horizons suggests that previous findings of increasing long-horizon predictability are more likely due to size distortions than to power gains. I illustrate the use of the bootstrap method by analyzing whether monetary fundamentals help predict changes in four major exchange rates.

Keywords: REGRESSION ANALYSIS; FINANCE; EXCHANGE RATE; FORECASTS (search for similar items in EconPapers)
JEL-codes: C22 C32 C52 C53 F31 F47 (search for similar items in EconPapers)
Pages: 31 pages
Date: 1997
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:401

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