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|Title:||Model Uncertainty and Exchange Rate Forecasting|
Remco C.J. Zwinkels
Erasmus School of Economics
De Nederlandsche Bank
Vrije Universiteit Amsterdam
|Keywords:||Business, Management and Accounting;Economics, Econometrics and Finance|
|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.|
|Appears in Collections:||Scopus 2016-2017|
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