A Review of Research on the Unstable Relation Between Exchange Rates and Their Fundamentals
Issued Date
2025-01-01
Resource Type
ISSN
09500804
eISSN
14676419
Scopus ID
2-s2.0-105023397332
Journal Title
Journal of Economic Surveys
Rights Holder(s)
SCOPUS
Bibliographic Citation
Journal of Economic Surveys (2025)
Suggested Citation
Cumperayot P., Gulati V., Kouwenberg R. A Review of Research on the Unstable Relation Between Exchange Rates and Their Fundamentals. Journal of Economic Surveys (2025). doi:10.1111/joes.70043 Retrieved from: https://repository.li.mahidol.ac.th/handle/123456789/113421
Title
A Review of Research on the Unstable Relation Between Exchange Rates and Their Fundamentals
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Author's Affiliation
Corresponding Author(s)
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Abstract
Economic fundamental models often perform poorly in exchange rate forecasting. Theory and empirical evidence suggest that one likely reason is that the relation between the exchange rate and fundamentals is highly unstable, with frequent changes in the best predictors. Since 1987, researchers have applied new statistical methods to better capture the time-varying relations, applying models with time-varying parameters, forecast combinations with dynamic weights, Bayesian model averaging, automated model selection criteria, and machine learning techniques. In this review, we synthesize the results of these studies, highlight the forecasting techniques with the most promising performance, and provide recommendations for researchers and market participants.