Byrne, Joseph P and Korobilis, Dimitris and Ribeiro, Pinho J (2014): On the Sources of Uncertainty in Exchange Rate Predictability.

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Abstract
We analyse the role of timevariation in coefficients and other sources of uncertainty in exchange rate forecasting regressions. Our techniques incorporate the notion that the relevant set of predictors and their corresponding weights, change over time. We find that predictive models which allow for sudden, rather than smooth, changes in coefficients significantly beat the random walk benchmark in outofsample forecasting exercise. Using an innovative variance decomposition scheme, we identify uncertainty in coefficients estimation and uncertainty about the precise degree of coefficients' variability, as the main factors hindering models' forecasting performance. The uncertainty regarding the choice of the predictor is small.
Item Type:  MPRA Paper 

Original Title:  On the Sources of Uncertainty in Exchange Rate Predictability 
Language:  English 
Keywords:  Instabilities; Exchange Rate Forecasting; TimeVarying Parameter Models; Bayesian Model Averaging; Forecast Combination; Financial Condition Indexes; Bootstrap 
Subjects:  C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C53  Forecasting and Prediction Methods ; Simulation Methods C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C58  Financial Econometrics E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E44  Financial Markets and the Macroeconomy F  International Economics > F3  International Finance > F37  International Finance Forecasting and Simulation: Models and Applications G  Financial Economics > G0  General > G01  Financial Crises 
Item ID:  58956 
Depositing User:  Dimitris Korobilis 
Date Deposited:  28. Sep 2014 21:48 
Last Modified:  28. Sep 2014 22:03 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/58956 