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On the sources of uncertainty in exchange rate predictability

Byrne, Joseph P and Korobilis, Dimitris and Ribeiro, Pinho J (2018) 'On the sources of uncertainty in exchange rate predictability.' International Economic Review, 59 (1). pp. 329-357. ISSN 0020-6598

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Abstract

In a unified framework, we examine four sources of uncertainty in exchange rate forecasting models: (i) random variations in the data, (ii) estimation uncertainty, (iii) uncertainty about the degree of time-variation in coefficients, and (iv) uncertainty regarding the choice of the predictor. We find that models which embed a high-degree of coefficient variability yield forecast improvements at horizons beyond 1-month. At the 1-month horizon, and apart from the standard variance implied by unpredictable fluctuations in the data, the second and third sources of uncertainty listed above are key obstructions to predictive ability. The uncertainty regarding the choice of the predictors is negligible.

Item Type: Article
Uncontrolled Keywords: Instabilities; Exchange Rate Forecasting; Time-Varying Parameter Models; Bayesian Model Averaging; Forecast Combination; Financial Condi- tion Indexes; Bootstrap
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 23 Nov 2016 12:38
Last Modified: 06 Jan 2022 14:41
URI: http://repository.essex.ac.uk/id/eprint/17943

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