Forecasting Euro Exchange Rates: How Much Does Model Averaging Help?
Economics and Statistics Working Paper No. 2007-24
22 Pages Posted: 25 Oct 2007
Date Written: 2007
Abstract
We analyze the performance of Bayesian model averaged exchange rate forecasts for euro/US dollar, euro/Japanese yen, euro/Swiss franc and euro/ British pound rates using weights based on the out-of-sample predictive likelihood. The paper also presents a simple stratified sampling procedure in the spirit of Sala i Martin et alia (2004) to obtain model weights based on predictive accuracy. Our results indicate that accounting explicitly for model uncertainty when constructing predictions of euro exchange rates leads to improvements in predictive accuracy as measured by the mean square forecast error. While the forecasting error of the combined forecast tends to be systematically smaller than that of the individual model that would have been chosen based on predictive accuracy in a test sample, random walk forecasts cannot be beaten significantly in terms of squared forecast errors. Direction of change statistics, on the other hand, are significantly improved by Bayesian model averaging.
Keywords: Forecasting, model averaging, Bayesian econometrics, exchange rates
JEL Classification: C11, C53, F31
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Tests of Equal Forecast Accuracy and Encompassing for Nested Models
-
Long Swings in the Exchange Rate: are They in the Data and Do Markets Know it?
-
Exchange Rates and Fundamentals
By Charles M. Engel and Kenneth D. West
-
Exchange Rates and Fundamentals
By Charles M. Engel and Kenneth D. West
-
Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
-
Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?
By Lutz Kilian
-
Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?
By Yin-wong Cheung, Menzie David Chinn, ...