Exchange rate forecasting: the errors we've really made

By Jon Faust, J. Rogers, Jonathan H. Wright. 2001

277 citations recorded by the source corpus.

We examine the forecasting performance of standard macro models of exchange rates in real time, using dozens of different vintages of the OECD's Main Economic Indicators database. We calculate out-of-sample forecasts as they would have been made at the time, and compare them to a random walk alternative. The resulting "time series" of forecast performance indicates that both data revisions and changes in the sample period typically have large effects on exchange rate predictability. We show that the favorable evidence of long-horizon exchange rate predictability for the DM and Yen in Mark (1995) is present in only a narrow two-year window of data vintages around that used by Mark. In addition, approximately one-third of the improved forecasting performance of Mark's monetary model over a random walk is eventually undone by data revisions. Related to this, we find the models consistently perform better using original release data than using fully revised data. Finally, we find that model-based exchange rate forecasts are sometimes better when using Federal Reserve Staff forecasts of future fundamentals instead of actual future values of fundamentals. This contradicts a cherished presumption in the literature that dates all the way back to Meese and Rogoff (1983).

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/ad96c0a8cce7cf280ef479e1e5ae65091bfbaa20

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Citations in the corpus

In-Sample or Out-of-Sample Tests of Predictability: Which One Should We Use? (2005, background): “u0t¯uj,t) . ( 21 ) Proposition 6. Suppose that Assumptions 1, 2 and 3 hold.”
Exchange Rates and Fundamentals: Footloose or Evolving Relationship? (2009, background): “, Mark, 1995; Mark and Sul, 2001; Groen, 2005). Sweeney (2006) also provides evidence that challenges the conventional wisdom that industrial-country oating exchange rates contain unit roots and that, in out-of-sample forecasts, mean-reversion models beat random walks on average, in some forecast p”
Forecasting exchange rates with a large Bayesian VAR (2009, background): “Defining ŷ i,t+h|t as the h-step ahead forecast of yi,t+h given the information available at time t, the h-step ahead forecast forecast error at time t is: FE h,t = ŷ M i,t+h|t − yi,t+h, (8)”
Taylor Rules with Real-Time Data: A Tale of Two Countries and One Exchange Rate (2008, methodology): “Although the argument for using real-time data seems at least as compelling for exchange rate forecasting as for Taylor rule modeling, the only paper, to our knowledge, that uses real-time data to evaluate nominal exchange rate predictability is Faust, Rogers, and Wright (2003).”
Heterogeneity of agents, transactions costs and the exchange rate (2005, background): “Goodhart (1989), Goodhart and Figlioli (1991) and more recently Faust et al. (2003) found that most of the changes in the exchange rates occur when there is no observable news in the fundamental economic variables.”
Real-Time Forecasts of the Real Price of Oil (2012, background): “As noted by Faust et al. (2005), bias is the simplest form of predictability in revision.”
Exchange Rate Fundamentals and Order Flow (2012, unknown): “5The importance of this distinction has been emphasied by Faust, Rogers, and Wright (2003).”
Bayesian Model Averaging and exchange rate forecasts (2003, unknown): “be very sensitive to the sample period (Groen (1999), Faust, Rogers and Wright (2003) ).”
Heterogeneous expectations, exchange rate dynamics and predictability (2007, unknown): “More recently, the findings of Mark (1995) have been questioned (see Kilian, 1999, and Faust et al., 2003).”
Macroeconomic Forecasting With Mixed-Frequency Data (2008, background): “2006a), although Ghysels and Wright (2006) looked at survey-based macroeconomic forecasts. We compare the results of using MIDAS to forecast output growth with two other approaches that exploit monthly data. The first of these approaches is an extension to the models used by Koenig, Dolmas, and Pige”
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).”