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Direct and Indirect Forecasting of Cross Exchange Rates

Imad A. Moosa and John Vaz
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Imad A. Moosa: School of Economics, Finance and Marketing, RMIT, Melbourne, Victoria, Australia
John Vaz: Department of Accounting and Finance, Monash University, Clayton, Victoria, Australia

Economia Internazionale / International Economics, 2018, vol. 71, issue 2, 173-190

Abstract: The objective of this paper is to determine whether direct forecasting is more or less accurate than indirect forecasting when applied to the cross exchange rate as a defined variable. By using the flexible price monetary model to represent three cross rates, the results show that indirect forecasting is better than direct forecasting, when forecasting accuracy is measured in terms of the root mean square error (RMSE), for two of the three cross rates examined while the opposite is true for the third rate. However, no difference is apparent when performance is measured in terms of directional accuracy. It is concluded that the choice between direct and indirect forecasting is an empirical issue and that the results of such an exercise are case-specific. Previsione diretta e indiretta dei tassi di cambio cross Lo scopo di questo studio è determinare se la previsione diretta è più o meno accurata di quella indiretta se applicata ai tassi di cambio cross. Utilizzando modelli monetari a prezzi flessibili per rappresentare tre tassi cross, i risultati mostrano che la previsione indiretta è migliore della previsione diretta (se l’accuratezza delle previsioni si misura in termini di root minimum square error), per due dei tre tassi di cambio, mentre è vero il contrario per il terzo tasso. Comunque, non c’è apparente differenza se la performance è misurata in termini di accuratezza direzionale. Si conclude che la scelta tra previsione diretta o indiretta è un problema empirico e che i risultati dipendono dal caso considerato.

Keywords: Forecasting; Random Walk; Exchange Rate Models; Cross Exchange Rates (search for similar items in EconPapers)
JEL-codes: C53 F31 F37 (search for similar items in EconPapers)
Date: 2018
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