The random walk as a forecasting benchmark: drift or no drift?
We examine the proposition that the random walk without drift is more powerful in predicting exchange rates than the random walk with drift. It is demonstrated that there is no theoretical reason why the random walk without drift always outperforms the random walk with drift and that this is an empi...
| Main Authors: | , |
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| Format: | Journal Article |
| Published: |
Routledge
2016
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| Online Access: | http://hdl.handle.net/20.500.11937/51456 |
| _version_ | 1848758702046183424 |
|---|---|
| author | Moosa, I. Burns, Kelly |
| author_facet | Moosa, I. Burns, Kelly |
| author_sort | Moosa, I. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | We examine the proposition that the random walk without drift is more powerful in predicting exchange rates than the random walk with drift. It is demonstrated that there is no theoretical reason why the random walk without drift always outperforms the random walk with drift and that this is an empirical issue. The results show that while the random walk without drift can outperform the random walk with drift in terms of the RMSE, it fails to do so in terms of the ability to predict the direction of change, measures that take into account magnitude and direction, and in terms of profitability. If the drift factor is allowed to change over time by estimating the model in time-varying parameter terms, the random walk with drift performs even better. |
| first_indexed | 2025-11-14T09:48:11Z |
| format | Journal Article |
| id | curtin-20.500.11937-51456 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T09:48:11Z |
| publishDate | 2016 |
| publisher | Routledge |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-514562017-09-13T15:46:01Z The random walk as a forecasting benchmark: drift or no drift? Moosa, I. Burns, Kelly We examine the proposition that the random walk without drift is more powerful in predicting exchange rates than the random walk with drift. It is demonstrated that there is no theoretical reason why the random walk without drift always outperforms the random walk with drift and that this is an empirical issue. The results show that while the random walk without drift can outperform the random walk with drift in terms of the RMSE, it fails to do so in terms of the ability to predict the direction of change, measures that take into account magnitude and direction, and in terms of profitability. If the drift factor is allowed to change over time by estimating the model in time-varying parameter terms, the random walk with drift performs even better. 2016 Journal Article http://hdl.handle.net/20.500.11937/51456 10.1080/00036846.2016.1153788 Routledge restricted |
| spellingShingle | Moosa, I. Burns, Kelly The random walk as a forecasting benchmark: drift or no drift? |
| title | The random walk as a forecasting benchmark: drift or no drift? |
| title_full | The random walk as a forecasting benchmark: drift or no drift? |
| title_fullStr | The random walk as a forecasting benchmark: drift or no drift? |
| title_full_unstemmed | The random walk as a forecasting benchmark: drift or no drift? |
| title_short | The random walk as a forecasting benchmark: drift or no drift? |
| title_sort | random walk as a forecasting benchmark: drift or no drift? |
| url | http://hdl.handle.net/20.500.11937/51456 |