Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
FIEF - Trade Union Institute for Economic Research Working Paper Series, FIEF - Trade Union Institute for Economic Research

No 175:
How to Beat the Random Walk

Annika Alexius

Abstract: Out-of-sample forecasting accuracy is a frequently used criterion for evaluating models of exchange rate determination. This paper shows that both UIP and PPP produce better exchange rate forecasts at the ten-year horizon than a random walk without drift. There are two novelties relative to previous studies. First, the effects of extending the horizons beyond four years have not been investigated. This is relevant because the influence of fundamental variables has been shown to increase with the forecasting horizon, and it may take considerably more than four years to reach the long run equilibrium in the case of exchange rates. Second, the exchange rate forecasts implied by uncovered interest parity have been neglected in this literature. UIP is typically rejected in empirical tests using data on short-term interest rates. However, long-term interest rates appear to be a quantitatively important determinant of nominal exchange rate changes.

Keywords: Exchange rates; Prediction; (follow links to similar papers)

JEL-Codes: F31; F47; (follow links to similar papers)

21 pages, December 28, 2001

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

WP175.pdf    PDF-file (421kB) 
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Sune Karlsson ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:fiefwp:0175 This page was generated on 2014-12-14 19:22:16