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Title: Model Uncertainty and Exchange Rate Forecasting
Authors: Roy Kouwenberg
Agnieszka Markiewicz
Ralph Verhoeks
Remco C.J. Zwinkels
Mahidol University
Erasmus School of Economics
De Nederlandsche Bank
Vrije Universiteit Amsterdam
Keywords: Business, Management and Accounting;Economics, Econometrics and Finance
Issue Date: 1-Feb-2017
Citation: Journal of Financial and Quantitative Analysis. Vol.52, No.1 (2017), 341-363
Abstract: © 2017 Michael G. Foster School of Business, University of Washington. Exchange rate models with uncertain and incomplete information predict that investors focus on a small set of fundamentals that changes frequently over time. We design a model selection rule that captures the current set of fundamentals that best predicts the exchange rate. Out-of-sample tests show that the forecasts made by this rule significantly beat a random walk for 5 out of 10 currencies. Furthermore, the currency forecasts generate meaningful investment profits. We demonstrate that the strong performance of the model selection rule is driven by time-varying weights attached to a small set of fundamentals, in line with theory.
ISSN: 17566916
Appears in Collections:Scopus 2016-2017

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