Long: Horizon Exchange Rate Predictability?

January 1, 1997

Preview Citation

Format: Chicago

Lorenzo Giorgianni, and Jeremy Berkowitz. Long: Horizon Exchange Rate Predictability?, (USA: International Monetary Fund, 1997) accessed November 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. By considering the implied vector error-correction model, we show that little is to be gained from estimating such regressions for horizons greater than one time period. We also show that in small to medium samples the long-horizon procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates, diagnostic statistics and graphical evidence incorrectly suggest a high degree of predictability of the dependent variable.

Subject: Econometric analysis, Exchange rates, Foreign exchange, Vector error correction models

Keywords: Diebold-Mariano statistic, Error-correction term, Exchange rate, Exchange rates, Horizon exchange rate predictability, LS t-statistics, Slope coefficient, Spot rate, Vector error correction models, WP

Publication Details

Pages:

21
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/006
Stock No:

WPIEA0061997
ISBN:

9781451842265
ISSN:

1018-5941

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