Exchange Rate Predictability
Barbara Rossi ()
No 9575, CEPR Discussion Papers from C.E.P.R. Discussion Papers
The main goal of this article is to provide an answer to the question: "Does anything forecast exchange rates, and if so, which variables?". It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends" on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift.
Keywords: Exchange Rates; Forecast Evaluation; Forecasting; Instability (search for similar items in EconPapers)
JEL-codes: C5 F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-his, nep-mon and nep-opm
References: View complete reference list from CitEc
Citations View citations in EconPapers (104) Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at email@example.com
Journal Article: Exchange Rate Predictability (2013)
Working Paper: Exchange Rate Predictability (2013)
Working Paper: Exchange rate predictability (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:9575
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=9575
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ..
Series data maintained by (). This e-mail address is bad, please contact .