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

Arbeitspapier

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. Moreover, we do not find evidence that parameter time variation helps to unravel exchange rate predictability by macroeconomic fundamentals. Finally, an economic evaluation of the different forecast models reveals that controlling for parameter time variation leads to higher portfolios returns, and to higher utility values for investors.

Object Details

• ISBN: 978-3-95729-264-3
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bundesbank Discussion Paper ; No. 19/2016

Classification and Topics

• Classification: Wirtschaft ; Bayesian Analysis: General ; Forecasting Models; Simulation Methods ; Foreign Exchange ; International Finance Forecasting and Simulation: Models and Applications
• Subject: exchange rates ; forecasting ; density forecasts ; BVAR ; time-varying parameters

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Abbate, Angela ; Marcellino, Massimiliano
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/142220
• Last update: 10.03.2025, 11:45 AM CET