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Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting

Martin Evans () and Richard Lyons ()

No 11042, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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. Our result that the micro-based model out-performs the macro model does not imply that macro fundamentals will never explain exchange rates. Quite the contrary, our findings are in fact consistent with the view that the principal driver of exchange rates is standard macro fundamentals. In Evans and Lyons (2004b)we report firm evidence that the non-public information that we exploit here for forecasting exchange rates is also useful for forecasting macro fundamentals themselves.

JEL-codes: F3 F4 G1 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-ets, nep-fin and nep-ifn
Note: IFM AP
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Published as Evans, Martin D. D. and Richard K. Lyons. "Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting," American Economic Review, 2005, v95(2,May), 405-414.

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Related works:
Chapter: Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting (2017) Downloads
Journal Article: Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting (2005) Downloads
Working Paper: Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting (2005) Downloads
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