Models for Forecasting Exchange Rates Essay Example | Topics and Well Written Essays - 2000 words

Models for Forecasting Exchange Rates - undertake Exampleis a function of sample size = N M = N/log NSchwartz criterion Consistent estimate of lag lengthAkaike lag length Minimum mean firm prediction errors criterion of the dependent variableSimilar to AR Weight (W) is assigned arbitrarily W = 0.95 Random Walk vex Current blot rate is a predictor of the future spot rate Basic model Requires no estimationWith a drift parameter Mean periodical (logarithmic) win over rate changeThese methods minimize criteria based on squared deviations but it will be ineffective when the fluctuations in foreign commutation rates is unusual - and not as based on reasons established in various studies of fluctuations.Multivariate Time Series Models - Unconstrained Vector Auto relapsing (var).(1. MEESE, Richard A. ROGOFF Kenneth)Under VAR model, contemporaneous value of each variable is regressed against lagged values of itself and all the other variables. The exchange rate equation isst = a i i s - 1 + a l z s t - 2 + a i n s f - n + BilXt - 1+ 2 X t - 2 + BiX,- + uiwhere X,_j is a vector of the explanatory variables in the earlier equation, lagged jperiods. (1. MEESE, Richard A. ROGOFF Kenneth)VAR yields better forecasts since it does not restrict any variables and is better equipped to tackle the estimation problems that plague the morphological models.Theoretical Models - Purchasing Power Parity Condition (PPP) , Sticky cost monetary model of Dornbusch and Frankel , Balassa- Samuelson model based on productivity differentials, uncovered interest rate check bit (UIP) (2. Cheung, Yin-Wong Chinn, Menzie D. Pascaul, Antonio Garcia)Model Assumption / determinationPurchasing Power Price indices...Richard A. MEESE, Kenneth ROGOFF)These methods minimize criteria based on squared deviations but it will be ineffective when the fluctuations in foreign exchange rates is unusual - and not as based on reasons established in various studies of fluctuations.Theoretical Models - Purchasing Power Parity Condition (PPP) , Sticky price monetary model of Dornbusch and Frankel , Balassa- Samuelson model based on productivity differentials, uncovered interest rate parity (UIP) (2. Cheung, Yin-Wong Chinn, Menzie D. Pascaul, Antonio Garcia)Let s be the log exchange rate, m and y be log interior(prenominal) money downslope and output and m* and y* be log foreign money stock and output. Following Mark, the money stock variables are constructed as four quarter moving averages, to eliminate seasonality. The original value of the log exchange rate predicted by the monetary model is f1 = (m-m*)-(y-y*)This model states that the nominal exchange rate is determined by home-foreign differentials in the monetary fundamentals used above as easily as short-term interest rates, expected inflation rates, and cumulated current account balances.There is no raise to suggest that exchange rate forecasts obtaine