2009
DOI: 10.1162/jeea.2009.7.4.786
|View full text |Cite
|
Sign up to set email alerts
|

Exchange Rates and Fundamentals: Footloose or Evolving Relationship?

Abstract: Using novel real-time data on a broad set of economic fundamentals for …ve major US dollar exchange rates over the recent ‡oat, we employ a predictive procedure that allows the relationship between exchange rates and fundamentals to evolve over time in a very general fashion. Our key …ndings are that: (i) the well-documented weak out-of-sample predictive ability of exchange rate models may be caused by poor performance of modelselection criteria, rather than lack of information content in the fundamentals; (ii… Show more

Help me understand this report

Search citation statements

Order By: Relevance

Paper Sections

Select...
3
1
1

Citation Types

3
82
0

Year Published

2011
2011
2018
2018

Publication Types

Select...
9
1

Relationship

1
9

Authors

Journals

citations
Cited by 145 publications
(85 citation statements)
references
References 107 publications
(156 reference statements)
3
82
0
Order By: Relevance
“…This is also in line with Gradojevic and Yang (2006). Also, and as pointed out by Sarno and Valente (2009), parameter instability caused by instabilities in macro fundamentals, and agents'heterogeneity, or swings in expectations about future values of the exchange rate, make it di¢ cult to select a predictive model. We show that our model speci…cations can address this issue.…”
Section: Introductionsupporting
confidence: 70%
“…This is also in line with Gradojevic and Yang (2006). Also, and as pointed out by Sarno and Valente (2009), parameter instability caused by instabilities in macro fundamentals, and agents'heterogeneity, or swings in expectations about future values of the exchange rate, make it di¢ cult to select a predictive model. We show that our model speci…cations can address this issue.…”
Section: Introductionsupporting
confidence: 70%
“…They include, inter alia, the recognition that in a present-value asset-pricing framework the exchange rate would follow a process very close to a random walk if at least one predictive variable has a unit root and the discount factor is close to unity (Engel and West, 2005); the failure of standard linear predictive regressions to capture the presence of parameter instability (e.g. Rossi, , 2006Sarno and Valente, 2009); the role of transaction costs (Obstfeld and Rogo¤, 2001); the presence of higher-order expectations and information heterogeneity (Bacchetta and van Wincoop, 2006); and the general issue of omitted fundamental variables (e.g. GR, 2007).…”
Section: Stylized Facts and Exchange Rate Predictabilitymentioning
confidence: 99%
“…In the case of exchange rates, is has been known at least since the by-now classic work by Meese and Rogoff (1983) that it is notoriously difficult to forecast fluctuations of exchange rates by means of economic "fundamentals". Results recently reported by Sarno and Valente (2009) show that the real-time forecasting approach may be a useful modeling device to study the potentially time-varying link between exchange rates and 13 The real-time forecasting approach accounts for such nonlinearities in a rudimentary way because the predictor variables and their coefficients can change over time. Notwithstanding, one can imagine extensions that strengthen the ability of the real-time forecasting approach to capture nonlinearities.…”
Section: Discussionmentioning
confidence: 99%