Buncic, Daniel (2008): A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006).
Download (589kB) | Preview
We show that long horizon forecasts from the nonlinear models that are considered in the study by Rapach andWohar (2006) cannot generate any forecast gains over a simple AR(1) specification. This is contrary to the findings reported in Rapach and Wohar (2006). Moreover, we illustrate graphically that the nonlinearity in the forecasts from the ESTAR model is the strongest when forecasting one step-ahead and that it diminishes as the forecast horizon increases. There exists, therefore, no potential whatsoever for the considered nonlinear models to outperform linear ones when forecasting far ahead. We also illustrate graphically why one step-ahead forecasts from the nonlinear ESTAR model fail to yield superior predictions to a simple AR(1).
|Item Type:||MPRA Paper|
|Original Title:||A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006)|
|Keywords:||PPP, regime modelling, nonlinear real exchange rate models, ESTAR, forecast evaluation|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications
C - Mathematical and Quantitative Methods > C2 - Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Daniel Buncic|
|Date Deposited:||28. Jan 2008 06:49|
|Last Modified:||14. Feb 2013 01:37|
Breunig, Robert V., Serineh Najarian and Adrian R. Pagan (2003): “Specification Testing of Markov Switching Models”, Oxford Bulletin of Economics and Statistics, 65(S1), 703– 725. Diebold, Francis X. and Roberto S. Mariano (1995): “Comparing Predictive Accuracy”, Journal of Business and Economic Statistics, 13(1), 253–263. Franses, Philip Hans and Dick van Dijk (2000): Nonlinear Time Series Models in Empirical Finance, Cambridge: Cambridge University Press. Harvey, David I., Stephen J. Leybourne and Paul Newbold (1997): “Testing the Equality of Prediction Mean Squared Errors”, International Journal of Forecasting, 13(2), 281–291. Newey, Whitney K. and Kenneth D.West (1987): “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix”, Econometrica, 55(3), 703–708. Obstfeld, Maurice and Alan M. Taylor (1997): “Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Hecksher’s Commodity Points Revisited”, Journal of the Japanese and International Economies, 11(4), 441–479. Pagan, Adrian R. (2002): “Learning About Models and Their Fit to Data”, International Economic Journal, 16(2), 1–18. Pagan, Adrian R. and Aman Ullah (1999): Nonparametric Econometrics, New York: Cambridge University Press. Rapach, David E. and Mark E. Wohar (2006): “The out-of-Sample Forecasting Performance of Nonlinear Models of Real Exchange Rate Behavior”, International Journal of Forecasting, 22(2), 341– 361. Taylor, Mark P., David A. Peel and Lucio Sarno (2001): “Nonlinear Adjustment in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles”, International Economic Review, 42(4), 1015–1042. White, Halbert (2000): “A Reality Check for Data Snooping”, Econometrica, 68(5), 1097– 1126.