We explore whether modelling parameter time variation improves the point, interval and density forecasts of nine major exchange rates vis-`a-vis the US dollar over the period 1976–2015. We find that modelling parameter time variation is needed for an accurate calibration of forecast confidence intervals and is better suited at long horizons and in high volatility periods. The biggest forecast improvements are obtained by modelling time variation in the volatilities of the innovations, rather than in the slope parameters. We do not find evidence that parameter time variation helps to unravel exchange rate predictability by macroeconomic fundamentals. However, an economic evaluation of the various forecast models reveals that controlling for parameter time variation and macroeconomic fundamentals leads to higher portfolios returns, and to higher utility values for investors

Point, interval and density forecasts of exchange rates with time varying parameter models

Marcellino, Massimiliano
2018

Abstract

We explore whether modelling parameter time variation improves the point, interval and density forecasts of nine major exchange rates vis-`a-vis the US dollar over the period 1976–2015. We find that modelling parameter time variation is needed for an accurate calibration of forecast confidence intervals and is better suited at long horizons and in high volatility periods. The biggest forecast improvements are obtained by modelling time variation in the volatilities of the innovations, rather than in the slope parameters. We do not find evidence that parameter time variation helps to unravel exchange rate predictability by macroeconomic fundamentals. However, an economic evaluation of the various forecast models reveals that controlling for parameter time variation and macroeconomic fundamentals leads to higher portfolios returns, and to higher utility values for investors
2018
2017
Abbate, Angela; Marcellino, Massimiliano
File in questo prodotto:
File Dimensione Formato  
Point interval and density forecasts.pdf

non disponibili

Tipologia: Pdf editoriale (Publisher's layout)
Licenza: NON PUBBLICO - Accesso privato/ristretto
Dimensione 2.28 MB
Formato Adobe PDF
2.28 MB Adobe PDF   Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/4013056
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 14
  • ???jsp.display-item.citation.isi??? 12
social impact