Long: Horizon Exchange Rate Predictability?

Lorenzo Giorgianni and Jeremy Berkowitz

No 1997/006, IMF Working Papers from International Monetary Fund

Abstract: Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. By considering the implied vector error-correction model, we show that little is to be gained from estimating such regressions for horizons greater than one time period. We also show that in small to medium samples the long-horizon procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates, diagnostic statistics and graphical evidence incorrectly suggest a high degree of predictability of the dependent variable.

Keywords: WP; exchange rate; error-correction term; slope coefficient; Diebold-Mariano statistic; horizon exchange rate predictability; LS t-statistics; spot rate; Exchange rates; Vector error correction models (search for similar items in EconPapers)
Pages: 21
Date: 1997-01-01
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Citations: View citations in EconPapers (12)

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