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NONLINEARITY, MACROECONOMIC FACTORS AND THE DOLLAR‐STERLING REAL EXCHANGE RATE
Author(s) -
Kim Hyeyoen
Publication year - 2012
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1455
Subject(s) - econometrics , economics , predictability , exchange rate , univariate , liberian dollar , random walk , sample (material) , econometric model , nonlinear system , us dollar , statistics , mathematics , macroeconomics , multivariate statistics , finance , chemistry , physics , chromatography , quantum mechanics
Using recently proposed econometric methods for summarising very large macroeconomic data sets into a small number of observable factors, we investigate the dollar‐sterling real exchange rate in the factor‐incorporated nonlinear framework. We have shown that the large information contained nonlinear model can improve the out‐of‐sample forecasting performance. The accuracy of predictability is examined by the statistical significance of Clark and West (2007) test, which adjusts the downward bias of difference of error terms in nested models. The superior result of out‐of‐sample forecasting of factor model to univariate one and random walk suggests that the poor out‐of‐sample forecasting performance in the existing empirical literature may result from a failure properly to allow for the wide range of macroeconomic influences on the equilibrium real exchange rate. Copyright © 2012 John Wiley & Sons, Ltd.