Buncic, Daniel (2009): Understanding forecast failure of ESTAR models of real exchange rates.
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The forecast performance of the empirical ESTAR model of Taylor, Peel and Sarno (2001) is examined for 4 bilateral real exchange rate series over an out-of-sample evaluation period of nearly 12 years. Point as well as density forecasts are constructed, considering forecast horizons of 1 to 22 steps head. The study finds that no forecast gains over a simple AR(1) specification exist at any of the forecast horizons that are considered, regardless of whether point or density forecasts are utilised in the evaluation. Non-parametric methods are used in conjunction with simulation techniques to learn about the models and their forecasts. It is shown graphically that the nonlinearity in the point forecasts of the ESTAR model decreases as the forecast horizon increases. The non-parametric methods show also that the multiple steps ahead forecast densities are normal looking with no signs of bi-modality, skewness or kurtosis. Overall, there seems little to be gained from using an ESTAR specification over a simple AR(1) model.
|Item Type:||MPRA Paper|
|Original Title:||Understanding forecast failure of ESTAR models of real exchange rates|
|English Title:||Understanding forecast failure of ESTAR models of real exchange rates|
|Keywords:||Purchasing power parity, regime modelling, non-linear real exchange rate models, ESTAR, forecast evaluation, density forecasts, non-parametric methods.|
|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
C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Daniel Buncic|
|Date Deposited:||10. Aug 2009 07:18|
|Last Modified:||11. Jan 2014 06:01|
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