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Forecasting the dollar/euro exchange rate: are international parities useful?
Author(s) -
Sosvillarivero Simón,
García Emma
Publication year - 2005
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.955
Subject(s) - economics , purchasing power parity , inflation (cosmology) , exchange rate , liberian dollar , random walk , relative purchasing power parity , econometrics , bond , us dollar , monetary economics , statistics , mathematics , finance , physics , theoretical physics
In this paper we assess the empirical relevance of an expectations version of purchasing power parity in forecasting the dollar/euro exchange rate. This version is based on the differential of inflation expectations derived from inflation‐indexed bonds for the euro area and the USA. Using the longest daily data for both the dollar/euro exchange rate and for the inflation expectations, our results suggest that, with few exceptions, our predictors behave significantly better than a random walk in forecasts up to five days, both in terms of prediction errors and in directional forecasts. Copyright © 2005 John Wiley & Sons, Ltd.