On the sources of uncertainty in exchange rate predictability

Byrne, J. P., Korobilis, D. and Ribeiro, P. J. (2018) On the sources of uncertainty in exchange rate predictability. International Economic Review, 59(1), pp. 329-357. (doi: 10.1111/iere.12271)

Abstract

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 which embed a high-degree of coefficient variability yield forecast improvements at horizons beyond 1-month. At the 1-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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Korompilis Magkas, Professor Dimitris and RIBEIRO, Pinho Jose and Byrne, Dr Joseph
• Authors: Byrne, J. P., Korobilis, D., and Ribeiro, P. J.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: International Economic Review
• Publisher: Wiley
• ISSN: 0020-6598
• ISSN (Online): 1468-2354
• Published Online: 28 November 2017
• Copyright Holders: Copyright © 2017 Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association
• First Published: First published in International Economic Review 59(1):329-357
• Publisher Policy: Reproduced in accordance with the publisher copyright policy