ON THE SOURCES OF UNCERTAINTY IN EXCHANGE RATE PREDICTABILITY

Joseph Byrne, Dimitris Korobilis and Pinho Ribeiro

International Economic Review, 2018, vol. 59, issue 1, 329-357

Abstract: In a unified framework, we examine four sources of uncertainty in exchange rate forecasting models: (i) random variations in the data, (ii) estimation uncertainty, (iii) uncertainty about the degree of time variation in coefficients, and (iv) uncertainty regarding the choice of the predictor. We find that models that embed a high degree of coefficient variability yield forecast improvements at horizons beyond one month. At the one†month horizon, and apart from the standard variance implied by unpredictable fluctuations in the data, the second and third sources of uncertainty listed above are key obstructions to predictive ability. The uncertainty regarding the choice of the predictors is negligible.

Date: 2018
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https://doi.org/10.1111/iere.12271

Related works:
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014)
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014)
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014)
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