Predicting swings in exchange rates with macro fundamentals

Shiu-Sheng Chen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates fundamentals-based exchange rate predictability from a different perspective. We focus on predicting currency swings (major trends in depreciation or appreciation) rather than on quantitative changes of exchange rates. Having used a nonparametric approach to identify swings in exchange rates, we examine the links between fundamentals and swings in exchange rates using both in-sample and out-of-sample forecasting tests. We use data from 12 developed countries, and our empirical evidence suggests that the uncovered interest parity fundamentals and Taylor rule model with interest rate smoothing are strong predictors of exchange rate swings.

Keywords: exchange rate swings; fundamentals (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-for, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:35772

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