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On the Sources of Uncertainty in Exchange Rate Predictability

Joseph Byrne (), Dimitris Korobilis and Pinho Ribeiro

MPRA Paper from University Library of Munich, Germany

Abstract: We analyse the role of time-variation in coefficients and other sources of uncertainty in exchange rate forecasting regressions. Our techniques incorporate the notion that the relevant set of predictors and their corresponding weights, change over time. We find that predictive models which allow for sudden, rather than smooth, changes in coefficients significantly beat the random walk benchmark in out-of-sample forecasting exercise. Using an innovative variance decomposition scheme, we identify uncertainty in coefficients estimation and uncertainty about the precise degree of coefficients' variability, as the main factors hindering models' forecasting performance. The uncertainty regarding the choice of the predictor is small.

Keywords: Instabilities; Exchange Rate Forecasting; Time-Varying Parameter Models; Bayesian Model Averaging; Forecast Combination; Financial Condition Indexes; Bootstrap (search for similar items in EconPapers)
JEL-codes: C53 C58 E44 F37 G01 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-upt
Date: 2014-09-26
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Related works:
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014) Downloads
Working Paper: On the Sources of Uncertainty in Exchange Rate Predictability (2014) Downloads
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