Long - Horizon Exchange Rate Predictability?
International Monetary Fund, Jan 1, 1997 - Foreign exchange rates - 19 pages
Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. By considering the implied vector error-correction model, we show that little is to be gained from estimating such regressions for horizons greater than one time period. We also show that in small to medium samples the long-horizon procedure gives rise to spurious evidence of predictive power. a simulation study demonstrates that even when using this technique on two independent series, estimates, diagnostic statistics and graphical evidence incorrectly suggest a high degree of predictability of the dependent variable.
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95th percentile actual k-period changes alternative hypothesis Andrews associated with long-horizon asymptotic autocorrelation autoregressive Bauer bias bias-adjusted bias-corrections Canadian Dollar Carlo critical values Chinn and Meese Diebold-Mariano statistics DM(A economic fundamentals empirical critical values empirical distribution equation error-correction term estimated slope coefﬁcients estimation results evidence of predictability exchange rate predictability ﬁ'om ﬁnd ﬁtndamental four exchange rates fundamentals and exchange fundamentals cointegrate Gaussian German Mark graphical evidence highly persistent horizon increases horizon of interest horizon regression INTERNATIONAL MONETARY FUND Japanese Yen lag of 20 large k’s long-horizon regression approach Main Economic Indicators monetary fundamentals Monte Carlo critical Monte Carlo experiment nonstationary null hypothesis OECD out-of-sample forecasts percent critical value random walk forecast rates and fundamentals rates and monetary regression is zero regressor Section simulation experiments slope parameter spot exchange rates spot rate spurious regression Stambaugh 1986 Stationarity statistical independence statistical relationship Swiss franc t-test Table truncation lag variable VECM