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    The unbeatable random walk in exchange rate forecasting: Reality or myth?

    Access Status
    Fulltext not available
    Authors
    Moosa, I.
    Burns, Kelly
    Date
    2014
    Type
    Journal Article
    
    Metadata
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    Citation
    Moosa, I. and Burns, K. 2014. The unbeatable random walk in exchange rate forecasting: Reality or myth? Journal of Macroeconomics. 40: pp. 69-81.
    Source Title
    Journal of Macroeconomics
    DOI
    10.1016/j.jmacro.2014.03.003
    ISSN
    0164-0704
    URI
    http://hdl.handle.net/20.500.11937/11881
    Collection
    • Curtin Research Publications
    Abstract

    It is demonstrated that the conventional monetary model of exchange rates can (irrespective of the specification, estimation method or the forecasting horizon) outperform the random walk in out-of-sample forecasting if forecasting power is measured by direction accuracy and profitability. Claims of outperforming the random walk in terms of the root mean square error are false because they are typically based on the introduction of dynamics, hence a random walk component, commonly without testing for the statistical significance of the difference between root mean square errors. And even if proper hypothesis testing reveals that a dynamic model outperforms the random walk, this amounts to beating the random walk by a random walk with the help of some explanatory variables. The failure of conventional macroeconomic models to outperform the random walk in terms of the root mean square error should be expected rather than considered to be a puzzle.

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      The Messe-Rogoff puzzle has been a debatable topic since 1983 when Richard Meese and Kenneth Rogoff demonstrated that no exchange rate model can outperform the random walk in out-of-sample forecasting. This finding been ...
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      Structural breaks have been suggested by several economists as a possible explanation for the Meese–Rogoff puzzle, in the sense that an exchange rate model can outperform the random walk in terms of the out-of-sample ...
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