FORECASTING DISCONNECTED EXCHANGE RATES
Version of Record online: 18 OCT 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 29, Issue 5, pages 713–735, August 2014
How to Cite
2014), FORECASTING DISCONNECTED EXCHANGE RATES, Journal of Applied Econometrics, 29, pages 713–735, doi: 10.1002/jae.2350(
- Issue online: 29 JUL 2014
- Version of Record online: 18 OCT 2013
- Manuscript Revised: 15 MAY 2013
- Manuscript Received: 9 MAR 2012
The inability of empirical models to forecast exchange rates has given rise to the belief that exchange rates are disconnected from macroeconomic fundamentals. This paper addresses the potential disconnect by endogenously selecting forecast models from a broad set of fundamentals. The procedure shows that exchange rates are not disconnected from fundamentals, but fundamentals vary in their predictive content at different forecast horizons and for different currencies. Performing model selection out-of-sample is challenging. At short horizons, the method cannot outperform a random walk, although the performance is improved at long horizons. These findings are confirmed across currencies and forecast evaluation methods. Copyright © 2013 John Wiley & Sons, Ltd.