Forecasting exchange rates under parameter and model uncertainty

Joscha Beckmann and Rainer Schüssler

Journal of International Money and Finance, 2016, vol. 60, issue C, 267-288

Abstract: We introduce a forecasting method that closely matches the econometric properties required by exchange rate theory. Our approach formally models (i) when (and if) predictor variables enter or leave a regression model, (ii) the degree of parameter instability, (iii) the (potentially) rapidly changing relevance of regressors, and (iv) the appropriate shrinkage intensity over time. We consider (short-term) forecasting of six major US dollar exchange rates using a standard set of macro fundamentals. Our results indicate the importance of shrinkage and flexible model selection/averaging criteria to avoid poor forecasting results.

Keywords: Exchange rate forecasting; Time-varying parameter models; Shrinkage; Model selection/averaging (search for similar items in EconPapers)
JEL-codes: F31 F37 G17 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (37)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:60:y:2016:i:c:p:267-288

DOI: 10.1016/j.jimonfin.2015.07.001

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