Can We Predict Exchange Rate Movements at Short Horizons?
Version of Record online: 3 JUN 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 31, Issue 7, pages 565–579, November 2012
How to Cite
Cheong, C., Kim, Y.-J. and Yoon, S.-M. (2012), Can We Predict Exchange Rate Movements at Short Horizons?. J. Forecast., 31: 565–579. doi: 10.1002/for.1236
- Issue online: 18 OCT 2012
- Version of Record online: 3 JUN 2011
- Manuscript Accepted: 16 MAR 2011
- Manuscript Revised: 28 FEB 2011
- Manuscript Received: 12 NOV 2009
- Korean government. Grant Number: NRF-2010-371-B00008
- exchange rate disconnect puzzle;
- risk premium
This paper explains the unpredictability of exchange rate movements at short horizons and provides a plausible answer on the exchange rate disconnect puzzle. By generalizing Chaboud and Wright's (Journal of International Economics 2005; 66: 349–362) work, it is shown that exchange rates follow a martingale process at short horizons but over long horizons may contain some predictable structure. The empirical results applied to several major currencies of the US dollar support our hypothesis. This evidence is not coincided with the explanation of the inefficient market hypothesis under which exchange rate movements can be predictable in both short and long horizons. Copyright © 2011 John Wiley & Sons, Ltd.