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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)
New Economics Papers: this item is included in nep-for, nep-mon and nep-opm
Date: 2017-03
Note: IFM
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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, .

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Journal Article: Exchange rate prediction redux: New models, new data, new currencies (2019) Downloads
Working Paper: Exchange rate prediction redux: new models, new data, new currencies (2017) Downloads
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