Forecast Evaluation of Nonlinear Models: The Case of Long-Span Real Exchange Rates
Article first published online: 19 SEP 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 31, Issue 7, pages 580–595, November 2012
How to Cite
Pavlidis, E. G., Paya, I. and Peel, D. A. (2012), Forecast Evaluation of Nonlinear Models: The Case of Long-Span Real Exchange Rates. J. Forecast., 31: 580–595. doi: 10.1002/for.1247
- Issue published online: 18 OCT 2012
- Article first published online: 19 SEP 2011
- Manuscript Accepted: 1 JUL 2011
- Manuscript Revised: 12 MAY 2011
- Manuscript Received: 9 JAN 2010
- real exchange rate;
- robust linearity tests;
- forecast evaluation;
This paper deals with the nonlinear modeling and forecasting of the dollar–sterling and franc–sterling real exchange rates using long spans of data. Our contribution is threefold. First, we provide significant evidence of smooth transition dynamics in the series by employing a battery of recently developed in-sample statistical tests. Second, we investigate the small-sample properties of several evaluation measures for comparing recursive forecasts when one of the competing models is nonlinear. Finally, we run a forecasting race for the post-Bretton Woods era between the nonlinear real exchange rate model, the random walk, and the linear autoregressive model. The nonlinear model outperforms all rival models in the dollar–sterling case but cannot beat the linear autoregressive in the franc–sterling. Copyright © 2011 John Wiley & Sons, Ltd.