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Multivariate nearest‐neighbour forecasts of ems exchange rates
Author(s) -
Mizrach B.
Publication year - 1992
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950070511
Subject(s) - multivariate statistics , statistic , random walk , econometrics , exchange rate , nonparametric statistics , statistics , lira , economics , mathematics , finance
Exchange rate modelling has been a persistent puzzle for international economists. Forecasts from popular models for the exchange rate generally fail to improve upon the random walk out‐of‐sample. While a multivariate nonparametric approach provides useful information about exchange rates, the model produces forecasts superior to the random walk for only one of the three EMS currencies examined. Using a statistic developed in Mizrach (1991), I find that the forecast improvement, a 4.5 percent reduction in mean squared error for the Lira in daily returns, is not statistically significant. A cross‐validation exercise suggests that the improvement is also not robust.