Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates

Zsolt Darvas and Zoltán Schepp ()
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Zoltán Schepp: University of Pécs

No 705, Working Papers from Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest

Abstract: This paper shows that error correction models assuming that long-maturity forward rates are stationary outperform the random walk in out of sample forecasting at forecasting horizons mostly above one year, for US dollar exchange rates against nine industrial countries’ currencies, using the 1990-2006 period for evaluating the out of sample forecasts. The improvement in forecast accuracy of our models is economically significant for most of the exchange rate series, and statistically significant according to a bootstrap test. Our results are robust to the specification of the error correction model and to the underlying data frequency.

Keywords: bootstrap; forecasting performance; out of sample; random walk; VECM (search for similar items in EconPapers)
JEL-codes: E43 F31 F47 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2007-05-18
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-for, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Forecasting exchange rates of major currencies with long maturity forward rates (2020)
Working Paper: Forecasting exchange rates of major currencies with long maturity forward rates (2020)
Working Paper: Forecasting Exchange Rates of Major Currencies with Long Maturity Forward Rates (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:mkg:wpaper:0705

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