Can Offshore Markets Beat Random Walk An Evaluation Of The Out Of Sample Rmb Exchange Rate Predictability
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Can Offshore Markets Beat Random Walk An Evaluation Of The Out Of Sample Rmb Exchange Rate Predictability
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Author : Sichong Chen
language : en
Publisher:
Release Date : 2016
Can Offshore Markets Beat Random Walk An Evaluation Of The Out Of Sample Rmb Exchange Rate Predictability written by Sichong Chen and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
This study evaluates the in-sample and out-of-sample RMB exchange rate forecasting with a predictor of CNH-CNY pricing differential. Despite significant evidence of in-sample fit of conditional models at short horizons, we find that RMB exchange rate forecasts based on CNH-CNY spreads do not work well out-of-sample. While the poor performance in predicting CNH is mainly driven by the PBC announcement on improving quotation of the central parity of RMB in Aug. 11, 2015, the out-of-sample performance of CNY predictions was consistently worse than its unconditional counterpart before 2015. However, we show that predictive regressions using CNH-CNY spreads can beat random walk even in the CNY market, as long as we remove trend from the CNH-CNY spread. Finally, we discuss policy implications of our forecasting results for pricing power and capital restrictions.
Revisiting The Out Of Sample Exchange Rate Predictability In The Monetary Model
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Author : Hsiu-Hsin Ko
language : en
Publisher:
Release Date : 2016
Revisiting The Out Of Sample Exchange Rate Predictability In The Monetary Model written by Hsiu-Hsin Ko and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
We utilize Monte Carlo simulations to evaluate, in finite samples, the forecasting performance of the monetary model. The data generating process (DGP) is based on the assumptions of Engel and West (2005) about the present-value model for exchange rates, namely that the discount factor is close to unity and the fundamentals have unit-root processes. We evaluate the out-of-sample performance of the monetary model against the random walk model by using the long-run regression test. While the forecasting power of the long-run regression is not strong, the experimental evidence illustrates that the probability of out-of-sample exchange rate predictability at long horizons is generally larger than that at the short horizons. We conclude that the present-value model under Engel and West's (2005) explanation has a heretofore unrecognized implication of out-of-sample exchange rate predictability at long run horizons.
Can The Random Walk Model Be Beaten In Out Of Sample Density Forecasts
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Author : Yongmiao Hong
language : en
Publisher:
Release Date : 2011
Can The Random Walk Model Be Beaten In Out Of Sample Density Forecasts written by Yongmiao Hong and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
Numerous studies have shown that the simple random walk model outperforms all structural and time series models in forecasting the conditional mean of exchange rate changes. However, in many important applications, such as risk management, forecasts of the probability distribution of exchange rate changes are often needed. In this paper, we develop a nonparametric portmanteau evaluation procedure for out-of-sample density forecast and provide a comprehensive empirical study on the out-of-sample performance of a wide variety of time series models in forecasting the intraday probability density of two major exchange rates - Euro/Dollar and Yen/Dollar. We find that some nonlinear time series models provide better density forecast than the simple random walk model, although they underperform in forecasting the conditional mean. For Euro/Dollar, it is important to model heavy tails through a Student-t innovation and asymmetric timevarying conditional volatility through a regime-switching GARCH model for both insample and out-of-sample performance; modeling conditional mean and serial dependence in higher order moments (e.g., conditional skewness), although important for in-sample performance, does not help out-of-sample density forecast. For Yen/Dollar, it is also important to model heavy tails and volatility clustering, and the best density forecast model is a RiskMetrics model with a Student-t innovation. As a simple application, we find that the models that provide good density forecast generally provide good forecast of Value-at-Risk.
Out Of Sample Exchange Rate Predictability In Emerging Markets
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Author : Ibrahim Jamali
language : en
Publisher:
Release Date : 2019
Out Of Sample Exchange Rate Predictability In Emerging Markets written by Ibrahim Jamali and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
We provide an in-depth analysis of the predictive ability of models with fundamentals and technical indicators for fourteen emerging market currencies. Our findings suggest that the forecasts from the symmetric Taylor rule as well as from a predictive regression exploiting the informational content of the momentum indicator are statistically superior to those of the random walk and other competing models. We combine the forecasts from the two best performing models via simple techniques and assess the economic significance of the out-of-sample forecasts using a trading strategy based on the sign of the predicted currency returns. Our economic significance results demonstrate that the symmetric Taylor rule, momentum and combination forecasts generate the largest net-of-transactions costs and risk-adjusted returns.
Predicting Exchange Rates Out Of Sample
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Author : Jiahan Li
language : en
Publisher:
Release Date : 2014
Predicting Exchange Rates Out Of Sample written by Jiahan Li and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This paper shows that economic fundamentals can generate reliable out-of-sample forecasts for exchange rates when prediction is based on a "kitchen-sink" regression that incorporates multiple predictors. The key to establishing predictability is estimating the kitchen-sink regression with the elastic-net shrinkage method, which improves performance by reducing the effect of less informative predictors in out-of-sample forecasting. Using statistical and economic measures of predictability, we show that our approach outperforms alternative models, including the random walk, individual exchange rate models, a kitchen-sink regression estimated with ordinary least squares, standard forecast combinations and popular ad-hoc strategies such as momentum and the 1/N strategy.
Why Is It So Difficult To Beat The Random Walk Forecast Of Exchange Rates
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Author : Lutz Kilian
language : en
Publisher:
Release Date : 2001
Why Is It So Difficult To Beat The Random Walk Forecast Of Exchange Rates written by Lutz Kilian and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with Foreign exchange rates categories.
Predictability Of Currency Returns
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Author : Akmal Kurbanov
language : en
Publisher:
Release Date : 2010
Predictability Of Currency Returns written by Akmal Kurbanov and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with categories.
Can we make an accurate foreign exchange rate forecast if we know what is the market's best "guess" on future direction of that rate? The author attempts to answer this question by investigating the predictive ability of risk-reversals - market traded derivative contracts that measure the expected skewness of exchange rate distribution. In order to find evidence in favor or against the use of risk reversals based forecasts the paper presents analysis of recent research in selected subject. The author applies econometric methods based on previous empirical works, to quantify the relationship between EURUSD exchange rates and 1 week ahead market expectations embedded in current prices risk reversals for the period of 01/2006-04/2010. The results obtained in the sample period show that variation in weekly changes of risk reversals can explain up to 55% in variation of the same period currency returns pointing to significant positive relationship. But the outcome of out of sample predictability test, in selected specification, could not beat benchmark Random Walk model with RMSE ratio of 1.06. Despite the low predictability, the evidence on risk reversals documented in this research paper contributes to existing literature by using weekly sampling and direct market quotes of risk reversals as explanatory variables to avoid "error in estimation" problem. Moreover the period before and after the events of fall 2008 is analyzed as well as robustness checked within several sampling methods. The debate of using options market implied expectations for accuracy of forecasts is still open and it seems that there is more uncovered issues left for research.
Exchange Rate Predictability
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Author : Barbara Rossi
language : en
Publisher:
Release Date : 2013
Exchange Rate Predictability written by Barbara Rossi and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Foreign exchange categories.
The main goal of this article is to provide an answer to the question: "Does anything forecast exchange rates, and if so, which variables?". It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends" on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift.
Taylor Rule Deviations And Out Of Sample Exchange Rate Predictability
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Author : Onur Ince
language : en
Publisher:
Release Date : 2019
Taylor Rule Deviations And Out Of Sample Exchange Rate Predictability written by Onur Ince and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
The Taylor rule has become the dominant model for academic evaluation of out-of-sample exchange rate predictability. Two versions of the Taylor rule model are the Taylor rule fundamentals model, where the variables that enter the Taylor rule are used to forecast exchange rate changes, and the Taylor rule differentials model, where a Taylor rule with postulated coefficients is used in the forecasting regression. We use data from 1973 to 2014 to evaluate short-run out-of-sample predictability for eight exchange rates vis-à-vis the U.S. dollar, and find strong evidence in favor of the Taylor rule fundamentals model alternative against the random walk null. The evidence of predictability is weaker with the Taylor rule differentials model, and still weaker with the traditional interest rate differential, purchasing power parity, and monetary models. The evidence of predictability for the fundamentals model is not related to deviations from the original Taylor rule for the U.S., but is related to deviations from a modified Taylor rule for the U.S. with a higher coefficient on the output gap. The evidence of predictability is also unrelated to deviations from Taylor rules for the foreign countries and adherence to the Taylor principle for the U.S.
Nonparametric Exchange Rate Prediction
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Author : Francis X. Diebold
language : en
Publisher:
Release Date : 1989
Nonparametric Exchange Rate Prediction written by Francis X. Diebold and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1989 with Foreign exchange categories.