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The Role of Economic Uncertainty in Forecasting Exchange Rate Returns and Realized Volatility: Evidence from Quantile Predictive Regressions

Christina Christou (), Rangan Gupta (), Christis Hassapis () and Tahir Suleman ()
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Christina Christou: School of Economics and Management, Open University of Cyprus, Latsia, Cyprus
Christis Hassapis: School of Economics and Management, Department of Economics, University of Cyprus, Nicosia, Cyprus
Tahir Suleman: School of Economics and Finance, Victoria University of Wellington and School of Business, Wellington Institute of Technology

No 201774, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we investigate whether the news-based measure of economic policy uncertainty (EPU), can be used to forecast exchange rate returns and volatility using a quantile regression approach, which accounts for persistence and endogeneity, using data from thirteen different countries. Our main findings suggest that: (i) EPU is useful for forecasting exchange rate returns and volatility, (ii) forecasting ability-quantile order relationships exhibit U-shape, possibly asymmetric form around the median and (iii) asymmetries are more pronounced in the case of forecasting volatility.

Keywords: Economic Policy Uncertainty; Exchange Rate Returns; Volatility; Quantile Predictive Regressions; Developed and Emerging Markets (search for similar items in EconPapers)
JEL-codes: C32 C53 E60 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mac
Date: 2017-10
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