Forecasting the dollar|euro exchange rate: are international parities useful?

Emma García and Simon Sosvilla-Rivero

Journal of Forecasting, 2005, vol. 24, issue 5, 369-377

Abstract: In this paper we assess the empirical relevance of an expectations version of purchasing power parity in forecasting the dollar|euro exchange rate. This version is based on the differential of inflation expectations derived from inflation-indexed bonds for the euro area and the USA.

Using the longest daily data for both the dollar|euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecasts. Copyright © 2005 John Wiley & Sons, Ltd.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:jof:jforec:v:24:y:2005:i:5:p:369-377

DOI: 10.1002/for.955

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