1538-4616/asset/bannerforeground.gif?v=1&s=7b7e290b64b973f7aa111e874a898985654720de)
Can Affine Term Structure Models Help Us Predict Exchange Rates?
Article first published online: 13 MAY 2009
DOI: 10.1111/j.1538-4616.2009.00230.x
© 2009 The Ohio State University
Additional Information
How to Cite
DE LOS RIOS, A. D. (2009), Can Affine Term Structure Models Help Us Predict Exchange Rates?. Journal of Money, Credit and Banking, 41: 755–766. doi: 10.1111/j.1538-4616.2009.00230.x
Publication History
- Issue published online: 13 MAY 2009
- Article first published online: 13 MAY 2009
- Received October 22, 2006; and accepted in revised form July 22, 2008.
- Abstract
- Article
- References
- Cited By
Keywords:
- E43;
- F31;
- G12;
- G15
- interest rates;
- exchange rates;
- affine term structure;
- out-of-sample predictability
This paper proposes an arbitrage-free model to extract the information that the term structure of forward premia contains for forecasting future spot exchange rates. Using monthly data on four U.S. dollar bilateral exchange rates, we find evidence that this model provides statistically better forecasts than those produced by a random walk for the British pound and Canadian dollar exchange rates. Negative results for the German mark/Euro and Swiss franc are explained by a rejection of the restrictions imposed by the term structure model.