Nowcasting of the Short-run Euro-Dollar Exchange Rate with Economic Fundamentals and Time-varying Parameters

Boniface Yemba, Olusegun Michael Otunuga, Biyan Tang and Nabaneeta Biswas

Finance Research Letters, 2023, vol. 52, issue C

Abstract: This paper nowcasts the Euro-Dollar short-run exchange rate by using a MF-TVP-FAVAR model. The FAVAR framework improves forecasting accuracy by expanding the information set of the previously widely used VAR models. We adopt a flexible modelling approach that adjusts for structural breaks in the data and money demand instability; it also prevents information loss due to variables being quoted at mixed frequencies. We estimate our model by using a dual conditionality linear Kalman filtering/smoothing. Our results indicate that the specified model outperforms the Random Walk and other structural models at all forecasting horizons.

Keywords: Euro-Dollar; Divisia monetary aggregates; Exchange rate nowcasting; FAVAR; Mixed frequencies (search for similar items in EconPapers)
JEL-codes: C01 C22 F31 F37 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322007474

DOI: 10.1016/j.frl.2022.103571

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