English

Exchange Rate Predictability in a Changing World

Statistical Finance 2014-03-05 v1

Abstract

An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.

Keywords

Cite

@article{arxiv.1403.0627,
  title  = {Exchange Rate Predictability in a Changing World},
  author = {Joseph Byrne and Dimitris Korobilis and Pinho Ribeiro},
  journal= {arXiv preprint arXiv:1403.0627},
  year   = {2014}
}

Comments

84 pages including additional appendix

R2 v1 2026-06-22T03:19:30.211Z