Exchange Rates Forecasting: Can Jump Models Combined with Macroeconomic Fundamentals Help?

Tomáš Bunčák

Prague Economic Papers, 2016, vol. 2016, issue 5, 527-546

Abstract: Connection between macroeconomic variables and foreign exchange (FX) rates evaluated in the context of out-of-sample forecasting is a well-known problem in economics. We propose a method that utilizes stochastic models based on jump processes (namely the normal inverse Gaussian and Meixner models), combines them with macroeconomic fundamentals, and using a moving (rolling or recursive) regularized estimation procedure produces forecasts of FX rates. These are compared to benchmark models, namely the direct forecast and the Gauss model forecast. Empirical out-of-sample experiments are performed on EUR/USD and USD/DKK currencies.

Keywords: cross-validation; out-of-sample testing; macroeconomic fundamentals; jump processes; exchange rates forecasting (search for similar items in EconPapers)
JEL-codes: C46 C53 F37 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.18267/j.pep.581

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