Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting
Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business) ()
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Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business): Department of Economics, Georgetown University, http://www9.georgetown.edu/faculty/evansm1/
Authors registered in the RePEc Author Service: Martin Evans () and
Richard K. Lyons ()
Working Papers from Georgetown University, Department of Economics
This paper compares the true, ex-ante forecasting performance of a micro-based model against both a standard macro model and a random walk. In contrast to existing literature, which is focused on longer horizon forecasting, we examine forecasting over horizons from one day to one month (the one-month horizon being where micro and macro analysis begin to overlap). Over our 3-year forecasting sample, we find that the micro-based model consistently out-performs both the random walk and the macro model. Micro-based forecasts account for almost 16 per cent of the sample variance in monthly spot rate changes. These results provide a level of empirical validation as yet unattained by other models. Though our micro-based model out-performs the macro model, this does not imply that past macro analysis has overlooked key fundamentals: our structural interpretation using a fundamentals-based model shows that our findings are consistent with exchange rates being driven by standard fundamentals.
Keywords: Exchange rates; forecasting; Meese and Rogoff; microstructure; order flow (search for similar items in EconPapers)
JEL-codes: F3 F4 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ifn
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Chapter: Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting (2017)
Journal Article: Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting (2005)
Working Paper: Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:geo:guwopa:gueconwpa~05-05-01
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