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A New Forecasting Model for USD/CNY Exchange Rate

Zongwu Cai, Chen Linna () and Ying Fang ()
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Chen Linna: Xiamen University

Studies in Nonlinear Dynamics & Econometrics, 2012, vol. 16, issue 3, 1-20

Abstract: This paper models the return series of USD/CNY exchange rate by considering the conditional mean and conditional volatility simultaneously. An index type functional-coefficient model is adopted to model the conditional mean part and a GARCH type model with a policy dummy variable is applied to the conditional volatility model. We show that the government policy indeed has an impact on the exchange rate dynamic. To evaluate the out-of-sample forecasting ability, a prediction interval is computed by employing nonparametric conditional quantile regression. Our method outperforms other popular models in terms of various criteria.

Date: 2012
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DOI: 10.1515/1558-3708.1878

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