Long horizon predictability of exchange rates: Is it for real?

Jan Groen

Empirical Economics, 1999, vol. 24, issue 3, 469 pages

Abstract: This paper reexamines recent results on the predictability of nominal exchange rate returns by means of fundamental models. Using a monthly sample of the post-Bretton Woods period we show that the in-sample fit between long-horizon exchange rate returns and various models is not significant if we correct for the persistence that is caused by overlapping data and spurious regression phenomena. The long horizon out-of-sample predictive power of the fundamental exchange rate models is found to be very weak. This is especially the case when we conduct the out-of-sample forecasting tests for a longer time span than that of earlier papers. We show that this failure in forecasting performance, resulting from extending the time span, is due to the absence of cointegration between exchange rates and structural exchange rate models.

Keywords: Exchange; rates; ·; forecasting; ·; pooled; forecasting; ·; random; walk (search for similar items in EconPapers)
JEL-codes: F31 F47 G15 (search for similar items in EconPapers)
Date: 1999-08-16
Note: received: September 1997/final version received: November 1998
References: Add references at CitEc
Citations: View citations in EconPapers (48)

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