A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006)

Buncic, Daniel (2008): A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006).

Abstract

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
• Language: English
• 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 ; Diffusion Processes; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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