Exchange Rate Prediction Redux: New Models, New Data, New Currencies

Yin-Wong Cheung, Menzie Chinn, Antonio Garcia Pascual and Yi Zhang

No 23267, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Previous assessments of nominal exchange rate determination, following Meese and Rogoff (1983) have focused upon a narrow set of models. Cheung et al. (2005) augmented the usual suspects with productivity based models, and "behavioral equilibrium exchange rate" models, and assessed performance at horizons of up to 5 years. In this paper, we further expand the set of models to include Taylor rule fundamentals, yield curve factors, and incorporate shadow rates and risk and liquidity factors. The performance of these models is compared against the random walk benchmark. The models are estimated in error correction and first-difference specifications. We examine model performance at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change), as well as the “consistency” test of Cheung and Chinn (1998). No model consistently outperforms a random walk, by a mean squared error measure, although purchasing power parity does fairly well. Moreover, along a direction-of-change dimension, certain structural models do outperform a random walk with statistical significance. While one finds that these forecasts are cointegrated with the actual values of exchange rates, in most cases, the elasticity of the forecasts with respect to the actual values is different from unity. Overall, model/specification/currency combinations that work well in one period will not necessarily work well in another period

JEL-codes: F31 F47 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-for, nep-mon and nep-opm
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published as Yin-Wong Cheung & Menzie D. Chinn & Antonio Garcia Pascual & Yi Zhang, 2018. "Exchange Rate Prediction Redux: New Models, New Data, New Currencies," Journal of International Money and Finance, .

Downloads: (external link)
http://www.nber.org/papers/w23267.pdf (application/pdf)

Related works:
Journal Article: Exchange rate prediction redux: New models, new data, new currencies (2019)
Working Paper: Exchange rate prediction redux: new models, new data, new currencies (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:23267

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w23267

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().