Long-Horizon Exchange Rate Predictability?

By Jeremy Berkowitz, Lorenzo Giorgianni. Review of Economics and Statistics, 2001

228 citations recorded by the source corpus.

Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction equations. We show by means of a simulation study that, in small to medium samples, inference from this regression procedure depends on the null hypothesis that is used to generate empirical critical values. The standard assumption of a stationary error-correction term between exchange rates and fundamentals biases the results in favor of predictive power. Our results show that evidence of long-horizon predictability weakens when using empirical critical values generated under the more stringent null of no cointegration. Likewise, results are weakened using critical values generated under the null that exchange rates and fundamentals are generated by an unrestricted VAR with no integration restrictions.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/1bf6f045671cc710211fb2bbe1b4620fdaccaeb2

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Citations in the corpus

New Methods for Inference in Long-Horizon Regressions (2011, unknown): “…(2006) for short-run, 1-period-horizon 1Other applications of long-horizon regressions include tests of exchange rate predictability (Mark (1995), Berkowitz and Giorgianni (2001), and Rossi (2005)), the Fisher effect (Mishkin (1990), (1992), Boudoukh and Richardson (1993)), and the neutrality of…”
Exchange Rates and Fundamentals: Footloose or Evolving Relationship? (2009, methodology): “However, others remain skeptical (e.g., Kilian, 1999; Berkowitz and Giorgianni, 2001; Faust, Rogers and Wright, 2003; Engel and West, 2005), so that evidence that exchange rate forecasts obtained using fundamentals models are better than forecasts from a random walk remains elusive (e.g., Cheung,…”
Can Oil Prices Forecast Exchange Rates (2011, unknown): “…has been found mainly at longer horizons (see Mark, 1995; Chinn and Meese, 1995; Cheung, Chinn and Pascual, 2005, and Engel, Mark and West, 2007), although inference procedures have been called into question (see Kilian, 1999; Berkowitz and Giorgianni, 2001; Rogo¤, 2007; and Rossi, 2005, 2007).”
Testing the monetary model of exchange rate determination: new evidence from a century of data (2002, methodology): “Berkowitz and Giorgianni (2001) challenge the robustness of Mark’s (1995) findings by showing that they hinge critically on the assumption that z is stationary (that is, that t nominal exchange rates and monetary fundamentals are cointegrated). This is problematic for Mark (1995), as he fails to fin”
An Economic Evaluation of Empirical Exchange Rate Models (2009, unknown): “…the case in classical inference, where the small samples typically employed in the study of exchange rate predictability combined with the assumption that exchange rates and fundamentals are cointegrated can have a critical impact in overstating predictability (e.g. Berkowitz and Giorgianni, 2001).”
Why is it so Difficult to Beat the Random Walk Rorecast of Exchange Rates? (2003, unknown): “Thus, by construction there can be no gain in power at longer horizons (see Berben and van Dijk 1998; Kilian 1999; Berkowitz and Giorgianni 2001).”
Heterogeneous expectations, exchange rate dynamics and predictability (2007, background): “For further details see Berkowitz and Giorgianni (2001) .”
In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use? (2005, background): “There is a large literature on testing the predictability of changes in the nominal exchange rate based on deviations of nominal exchange rates from macroeconomic fundamentals (see, eg, Berkowitz and Giorgianni, 2001 ; Chinn and Meese, 1995 ; Faust et al, 2003 ; Kilian, 1999 ; Kilian and Taylor,”
Exchange Rate Predictability (2013, unknown): “The robustness of Mark s (1995) ndings has, however, been questioned by Berkowitz and Giorgianni (2001), Kilian (1999), Groen (1999), Faust et al. (2003) and Rossi (2005a).”