Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertainty

Rangan Gupta, Shawkat Hammoudeh, Won Joong Kim and Beatrice Desiree Simo-Kengne ()

The North American Journal of Economics and Finance, 2014, vol. 28, issue C, 170-189

Abstract: We develop models for examining possible predictors of growth of China's foreign exchange reserves that embrace Chinese and global trade, financial and risk (uncertainty) factors. Specifically, by comparing with other alternative models, we show that the dynamic model averaging (DMA) and dynamic model selection (DMS) models outperform not only linear models (such as random walk, recursive OLS-AR(1) models, recursive OLS with all predictive variables models) but also the Bayesian model averaging (BMA) model for examining possible predictors of growth of those reserves. The DMS is the best overall across all forecast horizons. While some predictors matter more than others over the forecast horizons, there are few that stand the test of time. The US–China interest rate differential has a superior predictive power among the 13 predictors considered, followed by the nominal effective exchange rate and the interest rate spread for most of the forecast horizons. The relative predictive prowess of the oil and copper prices alternates, depending on the commodity cycles. Policy implications are also provided.

Keywords: Bayesian; State space models; Foreign reserve; Macroeconomic fundamentals; Forecasting (search for similar items in EconPapers)
JEL-codes: C11 C53 F37 F47 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Working Paper: Forecasting China’s Foreign Exchange Reserves Using Dynamic Model Averaging: The Role of Macroeconomic Fundamentals, Financial Stress and Economic Uncertainty (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:28:y:2014:i:c:p:170-189

DOI: 10.1016/j.najef.2014.02.003

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