Exchange rates forecasting model: an alternative estimation procedure
This study proposes an alternative procedure for modelling exchange rates behaviour, which is a linear combination of a long-run function and a short-run function. Our procedure involves modelling of the long-run relationship and this is followed by the short-run function. Among all the possible co...
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| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
Universiti Putra Malaysia Press
2004
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| Online Access: | http://psasir.upm.edu.my/id/eprint/3663/1/Exchange_Rates_Forecasting_Model_An.pdf http://psasir.upm.edu.my/id/eprint/3663/ |
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| Summary: | This study proposes an alternative procedure for modelling exchange rates behaviour, which is a linear combination of a long-run function and a short-run function. Our procedure involves modelling of the long-run relationship and
this is followed by the short-run function. Among all the possible combinations of modelling techniques, we proposed the simplest form, namely modelling the long-run function by the well established purchasing power parity (PPP) based
model and setting up the short-run function based on its time series properties. Results of this study suggest that our procedure yields powerful forecasting models as they easily outperform the simple random walk model-which is rarely defeated in the literature of exchange rate forecasting-in terms of out-of-sample forecasting, for all the forecast horizons ranging from one to fourteen quarters.
This study provides us with some hope of achieving a reasonable forecast for the ASEAN currencies using the fundamental monetary model just by a simple adaptation. |
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