Shiu-Sheng, Chen (2012): Predicting swings in exchange rates with macro fundamentals.
Download (244Kb) | Preview
This paper investigates fundamentals-based exchange rate predictability from a different perspective. We focus on predicting currency swings (major trends in depreciation or appreciation) rather than on quantitative changes of exchange rates. Having used a nonparametric approach to identify swings in exchange rates, we examine the links between fundamentals and swings in exchange rates using both in-sample and out-of-sample forecasting tests. We use data from 12 developed countries, and our empirical evidence suggests that the uncovered interest parity fundamentals and Taylor rule model with interest rate smoothing are strong predictors of exchange rate swings.
|Item Type:||MPRA Paper|
|Original Title:||Predicting swings in exchange rates with macro fundamentals|
|Keywords:||exchange rate swings, fundamentals|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
|Depositing User:||Shiu-Sheng Chen|
|Date Deposited:||06. Jan 2012 21:16|
|Last Modified:||18. Feb 2013 17:04|
Candelon, Bertrand, Piplack, Jan, and Straetmans, Stefan (2008), “On measuring synchronization of bulls and bears: The case of East Asia”, Journal of Banking and Finance, 32(6),1022–1035.
Cheung, Yin-Wong, Chinn, Menzie D., and Pascual, Antonio Garcia (2005), “Empirical exchange rate models of the nineties: Are any fit to survive?”, Journal of International Money and Finance, 24(7), 1150–1175.
Clark, Todd E. and West, Kenneth D. (2007), “Approximately normal tests for equal predictive accuracy in nested models”, Journal of Econometrics, 138, 291–311.
Darne, Olivier and Ferrara, Laurent (2011), “Identification of slowdowns and accelerations for the euro area economy*”, Oxford Bulletin of Economics and Statistics, 73(3), 335–364.
Davidson, Russell (2007), “Bootstrapping econometric models”, Quantile, (3), 13–36.
Diebold, Francis X. and Rudebusch, Glenn D.(1989), “Scoring the leading indicators”, Journal of Business, 62(3), 369–391.
Engel, Charles (1994), “Can the markov switching model forecast exchange rates?”, Journal of International Economics, 36, 151–165.
Engel, Charles and Hamilton, James D. (1990), “Long swings in the dollar: Are they in data and do markets know it?”, American Economic Review, 80, 689–713.
Engel, Charles, Mark, Nelson C., and West, Kenneth D. (2007), “Exchange rate models are not as bad as you think”, in NBER Macroeconomics Annual 2007, Volume 22, NBER Chapters,381–441, National Bureau of Economic Research, Inc.
Engel, Charles and West, Kenneth D. (2005), “Exchange rates and fundamentals”, Journal of Political Economy, 113, 485–517.
Estrella, Arturo (1998), “A new measure of fit for equations with dichotomous dependent variables”, Journal of Business and Economic Statistics, 16(2), 198–205.
Estrella, Arturo andMishkin, Frederic S.(1998), “Predicting u.s. recessions: Financial variables as leading indicators”, Review of Economics and Statistics, 80(1), 45–61.
Inoue, Atsushi and Kilian, Lutz (2005), “In-sample or out-of-sample tests of predictability: Which one should we use?”, Econometric Reviews, 23(4), 371–402.
Kaminsky, Graciela Laura and Schmukler, Sergio L. (2008), “Short-run pain, long-run gain: Financial liberalization and stock market cycles.”, Review of Finance, 12(2), 253 – 292.
Klaassen, Franc (2005), “Long swings in exchange rates: Are they really in the data?”, Journal of Business & Economic Statistics, 23, 87–95.
Mark, Nelson C. (1995), “Exchange rates and fundamentals: Evidence on long-horizon predictability”, American Economic Review, 85, 201–218.
Mark, Nelson C. and Sul, Donggyu (2001), “Nominal exchange rates and monetary fundamentals evidence from a small post-bretton woods panel”, Journal of International Economics, 29–52.
Meese, Richard and Rogoff, Kenneth (1983), “Empirical exchange rate models of the 1970’s: Do they fit out of sample?”, Journal of International Economics, 14, 3–24.
Molodtsova, Tanya and Papell, David H. (2009), “Out-of-sample exchange rate predictability with taylor rule fundamentals”, Journal of International Economics, 77(2), 167–180.
Monch, Emanuel and Uhlig, Harald (2005), “Towards a monthly business cycle chronology for the euro area”, Journal of Business Cycle Measurement and Analysis, 2005(1), 2.
Pagan, Adrian R. and Sossounov, Kirill A. (2003), “A simple framework for analysing bull and bear markets.”, Journal of Applied Econometrics, 18(1), 23 – 46.
Rogoff, Kenneth S. and Stavrakeva, Vania (2008), “The continuing puzzle of short horizon exchange rate forecasting”, NBER Working Papers 14071, National Bureau of Economic Research, Inc.
Stock, James H. and Watson, Mark W. (2010a), “Estimating turning points using large data sets”, NBER Working Papers 16532, National Bureau of Economic Research, Inc.
Stock, James H. and Watson, Mark W. (2010b), “Indicators for dating business cycles: Cross-history selection and comparisons”, American Economic Review, 100(2), 16–19.