The unbeatable random walk in exchange rate forecasting: Reality or myth?
It is demonstrated that the conventional monetary model of exchange rates can (irrespective of the specification, estimation method or the forecasting horizon) outperform the random walk in out-of-sample forecasting if forecasting power is measured by direction accuracy and profitability. Claims of...
| Main Authors: | , |
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| Format: | Journal Article |
| Published: |
Elsevier
2014
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| Online Access: | http://hdl.handle.net/20.500.11937/11881 |
| _version_ | 1848747923222822912 |
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| author | Moosa, I. Burns, Kelly |
| author_facet | Moosa, I. Burns, Kelly |
| author_sort | Moosa, I. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | It is demonstrated that the conventional monetary model of exchange rates can (irrespective of the specification, estimation method or the forecasting horizon) outperform the random walk in out-of-sample forecasting if forecasting power is measured by direction accuracy and profitability. Claims of outperforming the random walk in terms of the root mean square error are false because they are typically based on the introduction of dynamics, hence a random walk component, commonly without testing for the statistical significance of the difference between root mean square errors. And even if proper hypothesis testing reveals that a dynamic model outperforms the random walk, this amounts to beating the random walk by a random walk with the help of some explanatory variables. The failure of conventional macroeconomic models to outperform the random walk in terms of the root mean square error should be expected rather than considered to be a puzzle. |
| first_indexed | 2025-11-14T06:56:51Z |
| format | Journal Article |
| id | curtin-20.500.11937-11881 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T06:56:51Z |
| publishDate | 2014 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-118812017-09-13T16:06:10Z The unbeatable random walk in exchange rate forecasting: Reality or myth? Moosa, I. Burns, Kelly Exchange rate models Random walk Forecasting Monetary model Direction accuracy It is demonstrated that the conventional monetary model of exchange rates can (irrespective of the specification, estimation method or the forecasting horizon) outperform the random walk in out-of-sample forecasting if forecasting power is measured by direction accuracy and profitability. Claims of outperforming the random walk in terms of the root mean square error are false because they are typically based on the introduction of dynamics, hence a random walk component, commonly without testing for the statistical significance of the difference between root mean square errors. And even if proper hypothesis testing reveals that a dynamic model outperforms the random walk, this amounts to beating the random walk by a random walk with the help of some explanatory variables. The failure of conventional macroeconomic models to outperform the random walk in terms of the root mean square error should be expected rather than considered to be a puzzle. 2014 Journal Article http://hdl.handle.net/20.500.11937/11881 10.1016/j.jmacro.2014.03.003 Elsevier restricted |
| spellingShingle | Exchange rate models Random walk Forecasting Monetary model Direction accuracy Moosa, I. Burns, Kelly The unbeatable random walk in exchange rate forecasting: Reality or myth? |
| title | The unbeatable random walk in exchange rate forecasting: Reality or myth? |
| title_full | The unbeatable random walk in exchange rate forecasting: Reality or myth? |
| title_fullStr | The unbeatable random walk in exchange rate forecasting: Reality or myth? |
| title_full_unstemmed | The unbeatable random walk in exchange rate forecasting: Reality or myth? |
| title_short | The unbeatable random walk in exchange rate forecasting: Reality or myth? |
| title_sort | unbeatable random walk in exchange rate forecasting: reality or myth? |
| topic | Exchange rate models Random walk Forecasting Monetary model Direction accuracy |
| url | http://hdl.handle.net/20.500.11937/11881 |