Multivariate Nearest-Neighbor Forecasts of EMS Exchange Rates

Bruce Mizrach

Journal of Applied Econometrics, 1992, vol. 7, issue S, S151-63

Abstract: Exchange rate modelling has been a persistent puzzle for international economists. Forecasts from popular models for the exchange rate generally fail to improve upon the random walk out-of-sample. While a multivariate nonparametric approach provides useful information about exchange rates, the model produces forecasts superior to the random walk for only one of the three EMS currencies examined. Using a statistic developed in Mizrach (1991), I find that the forecast improvement, a 4.5 percent reduction in mean squared error for the Lira in daily returns, is not statistically significant. A cross-validation exercise suggests that the improvement is also not robust. Copyright 1992 by John Wiley & Sons, Ltd.

Date: 1992
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