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    The Monetary Model of Exchange Rates is Better than the Random Walk in Out-Of-Sample Forecasting

    Access Status
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    Authors
    Moosa, I.
    Burns, Kelly
    Date
    2013
    Type
    Journal Article
    
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    Citation
    Moosa, I. and Burns, K. 2013. The Monetary Model of Exchange Rates is Better than the Random Walk in Out-Of-Sample Forecasting. Applied Economics Letters. 20 (14): pp. 1293-1297.
    Source Title
    Applied Economics Letters
    DOI
    10.1080/13504851.2013.799753
    ISSN
    1350-4851
    URI
    http://hdl.handle.net/20.500.11937/15067
    Collection
    • Curtin Research Publications
    Abstract

    It is demonstrated that the monetary model of exchange rates is better than the random walk in out-of-sample forecasting if forecasting accuracy is measured by metrics that take into account the magnitude of the forecasting errors and the ability of the model to predict the direction of change. It is suggested that such a metric is the numerical value of the Wald test statistic for the joint coefficient restriction implied by the line of perfect forecast. The results reveal that the monetary model outperforms the random walk in out-of-sample forecasting for four different exchange rates.

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