Are Exchange Rates Really Random Walks? Some Evidence Robust to Parameter Instability
Barbara Rossi ()
Data from EconWPA
Many authors have documented that it is challenging to explain exchange rate fluctuations with macroeconomic fundamentals: a random walk forecasts future exchange rates better than existing macroeconomic models. This paper applies newly developed tests for nested model that are robust to the presence of parameter instability. The empirical evidence shows that for some countries we can reject the hypothesis that exchange rates are random walks. This raises the possibility that economic models were previously rejected not because the fundamentals are completely unrelated to exchange rate fluctuations, but because the relationship is unstable over time and, thus, difficult to capture by Granger Causality tests or by forecast comparisons. We also analyze forecasts that exploit the time variation in the parameters and find that, in some cases, they can improve over the random walk.
Keywords: forecasting; exchange rates; parameter instability; random walks (search for similar items in EconPapers)
JEL-codes: C52 C53 F3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ifn
Note: Type of Document - zip. The zip file contains two directories, each of which contains files to replicate the results in the two distinct sections of the paper (sections 4 and 5). The data are in .txt format, and the codes are in Matlab. Both directories contain a readme file.
References: Add references at CitEc
Citations View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Journal Article: ARE EXCHANGE RATES REALLY RANDOM WALKS? SOME EVIDENCE ROBUST TO PARAMETER INSTABILITY (2006)
Working Paper: Are Exchange Rates Really Random Walks? Some Evidence Robust to Parameter Instability (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpda:0503001
Access Statistics for this paper
More papers in Data from EconWPA
Series data maintained by EconWPA ().