The Term Structure of Forward Premiums. Can They Be Used for Understanding of Transition Economy Exchange Rate?
DOI:
https://doi.org/10.18778/1508-2008.9.09Abstract
The problem of forecasting exchange rate is apparent in economic literature since Meese and Rogoff (1983). Clarida and Taylor (1997) show that it is possible to beat the random walk forecast by the usage of VECM that uses term structure of forward premiums. This paper tries to use this type of model for forecasting of Zloty / Sterling exchange rate. It finds that the original model does not fit the exchange rate of transition economy due to the fact of non stationary deviations form Risk Neutral Efficient Market Hypothesis. The paper presents the addition of long term interest rate differential as a remedy for non stationary deviation problem. The conclusion from the model is that the model of the term structure of forward premiums cannot totally outperform random walk in an out-of-sample forecast of Zloty / Sterling exchange rate.
Downloads
References
Stephen Beveridge and Charles R. Nelson, “A New Approach to Decomposition of Economic Time Series Into Permanent and Transitory Components with Particular Attention to Measurement of the "Business Cycle"”, Journal of Monetary Economics, Volume 7, Issue 2, pp. 151-174, 1981.
Richard H. Clarida and Mark P. Taylor, “The Term Structure of Foreward Exchange Premiums and the Forecastability of Spot Exchange Rates: Correcting the Errors”, The Review of Economics and Statistics, Vol. LXXIX, August 1997/3.
Richard H. Clarida, Lucio Sarno, Mark P. Taylor and Giorgio Valente, “The Out-of-Sample of Term Structure Models as Exchange Rate Predictors: A step Beyond” Journal of International Economics, 60(1), pp. 61-83, 2003.
Walter Enders, “Applied Econometric Time Series” Hoboken, NJ:Wiley, 2004.
Martin D. Evans and Karen K. Lewis, “Do Long-Term Swings in the Dollar Affect estimates of Premia?” Review of Financial Studies, 8, pp. 709-724, 1995.
Richard Meese and Kenneth Rogoff, “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?”, Journal of International Economics 14, pp. 3-24, 1983.
Kerry Patterson, “An Introduction to Applied Econometrics, a time series approach”, MacMillan Press Ltd, 2000.
Lucio Sarno, Mark P. Taylor, “The economics of exchange rates”, Cambridge University Press, 2005.
James Stock and Mark Watson, “Testing for Common Trends”, Journal of the American Statistical Association 83, 1988.
Marno Verbeek,” A Guide to Modern Econometrics”, John Wiley & Sons, Ltd, 2004.
Eric Zivot, “The power of single equation test for cointegration when the cointegrating vector is prespecified”, Economic Theory, 1999.
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
How to Cite
