Model instability in predictive exchange rate regressions

Arbeitspapier

In this paper we aim to improve existing empirical exchange rate models by accounting for uncertainty with respect to the underlying structural representation. Within a flexible Bayesian non-linear time series framework, our modeling approach assumes that different regimes are characterized by commonly used structural exchange rate models, with their evolution being driven by a Markov process. We assume a time-varying transition probability matrix with transition probabilities depending on a measure of the monetary policy stance of the central bank at the home and foreign country. We apply this model to a set of eight exchange rates against the US dollar. In a forecasting exercise, we show that model evidence varies over time and a model approach that takes this empirical evidence seriously yields improvements in accuracy of density forecasts for most currency pairs considered.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Papers in Economics ; No. 2018-08

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models; Multiple Variables: General ; Business Fluctuations; Cycles ; Monetary Policy ; Foreign Exchange
• Subject: Empirical exchange rate models ; exchange rate fundamentals ; Markov switching

Contributors, Location and Time

• Event: Geistige Schöpfung
• (who): Hauzenberger, Niko ; Huber, Florian
• Event: Veröffentlichung
• (who): University of Salzburg, Department of Social Sciences and Economics
• (where): Salzburg
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/201676
• Last update: 20.09.2024, 8:23 AM CEST