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Forecasting and combining competing models of exchange rate determination

Altavilla, Carlo and de Grauwe, Paul (2010) Forecasting and combining competing models of exchange rate determination. Applied Economics, 42 (27). pp. 3455-3480. ISSN 0003-6846

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Abstract

This article investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and the underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.

Item Type: Article
Official URL: http://www.tandfonline.com/toc/raec20/current
Additional Information: © 2010 Taylor & Francis
Library of Congress subject classification: H Social Sciences > HG Finance
J Political Science > JZ International relations
Journal of Economic Literature Classification System: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 05 Oct 2012 13:11
URL: http://eprints.lse.ac.uk/46593/

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