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Are Exchange Rates Really Random Walks? Some Evidence Robust To Parameter Instability

dc.contributor.author Rossi, B
dc.date.accessioned 2010-06-28T19:00:12Z
dc.date.available 2010-06-28T19:00:12Z
dc.date.issued 2006-02
dc.identifier.uri https://hdl.handle.net/10161/2601
dc.description.abstract Many authors have documented that it is challenging to explain exchange rate fluctuations with macroeconomic fundamentals: a random walk forecasts future exchange rates better than existing macroeconomic models. This paper applies newly developed tests for nested model that are robust to the presence of parameter instability. The empirical evidence shows that for some countries we can reject the hypothesis that exchange rates are random walks. This raises the possibility that economic models were previously rejected not because the fundamentals are completely unrelated to exchange rate fluctuations, but because the relationship is unstable over time and, thus, difficult to capture by Granger Causality tests or by forecast comparisons. We also analyze forecasts that exploit the time variation in the parameters and find that, in some cases, they can improve over the random walk.
dc.format.extent 255496 bytes
dc.format.mimetype application/pdf
dc.language.iso en_US
dc.publisher Cambridge University Press (CUP)
dc.subject Forecasting
dc.subject Parameter instability
dc.subject Random walks
dc.subject exchange rates
dc.title Are Exchange Rates Really Random Walks? Some Evidence Robust To Parameter Instability
dc.type Journal article
duke.contributor.id Rossi, B|0284645


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