Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting
The proposition that dynamic exchange rate models can outperform the random walk in out-of-sample forecasting, in the sense that they produce lower mean square errors, is examined and disputed. By using several dynamic versions of three macroeconomic exchange rate models, it is demonstrated that dyn...
| Main Authors: | , |
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| Format: | Journal Article |
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Routledge
2014
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| Online Access: | http://hdl.handle.net/20.500.11937/7264 |
| _version_ | 1848745319657897984 |
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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 | The proposition that dynamic exchange rate models can outperform the random walk in out-of-sample forecasting, in the sense that they produce lower mean square errors, is examined and disputed. By using several dynamic versions of three macroeconomic exchange rate models, it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk. The results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable, which in effect is a random walk component. The analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component. |
| first_indexed | 2025-11-14T06:15:28Z |
| format | Journal Article |
| id | curtin-20.500.11937-7264 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T06:15:28Z |
| publishDate | 2014 |
| publisher | Routledge |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-72642017-09-13T16:06:26Z Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting Moosa, I. Burns, Kelly random walk error correction models forecasting exchange rate models The proposition that dynamic exchange rate models can outperform the random walk in out-of-sample forecasting, in the sense that they produce lower mean square errors, is examined and disputed. By using several dynamic versions of three macroeconomic exchange rate models, it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk. The results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable, which in effect is a random walk component. The analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component. 2014 Journal Article http://hdl.handle.net/20.500.11937/7264 10.1080/00036846.2014.922675 Routledge restricted |
| spellingShingle | random walk error correction models forecasting exchange rate models Moosa, I. Burns, Kelly Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| title | Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| title_full | Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| title_fullStr | Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| title_full_unstemmed | Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| title_short | Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| title_sort | error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting |
| topic | random walk error correction models forecasting exchange rate models |
| url | http://hdl.handle.net/20.500.11937/7264 |