Premium
ON THE SOURCES OF UNCERTAINTY IN EXCHANGE RATE PREDICTABILITY
Author(s) -
Byrne Joseph P.,
Korobilis Dimitris,
Ribeiro Pinho J.
Publication year - 2018
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12271
Subject(s) - predictability , econometrics , variance (accounting) , exchange rate , variation (astronomy) , degree (music) , sensitivity analysis , contrast (vision) , variance components , statistics , economics , horizon , yield (engineering) , mathematics , uncertainty analysis , computer science , materials science , metallurgy , physics , geometry , accounting , artificial intelligence , astrophysics , acoustics , macroeconomics
In a unified framework, we examine four sources of uncertainty in exchange rate forecasting models: (i) random variations in the data, (ii) estimation uncertainty, (iii) uncertainty about the degree of time variation in coefficients, and (iv) uncertainty regarding the choice of the predictor. We find that models that embed a high degree of coefficient variability yield forecast improvements at horizons beyond one month. At the one‐month horizon, and apart from the standard variance implied by unpredictable fluctuations in the data, the second and third sources of uncertainty listed above are key obstructions to predictive ability. The uncertainty regarding the choice of the predictors is negligible.