TY - JOUR
T1 - Forecasting the UK/US exchange rate with divisia monetary models and neural networks
AU - Bissoondeeal, Rakesh
AU - Karoglou, Michail
AU - Gazely, Alicia M.
PY - 2012/2
Y1 - 2012/2
N2 - This paper compares the UK/US exchange rate forecasting performance of linear and nonlinear models based on monetary fundamentals, to a random walk (RW) model. Structural breaks are identified and taken into account. The exchange rate forecasting framework is also used for assessing the relative merits of the official Simple Sum and the weighted Divisia measures of money. Overall, there are four main findings. First, the majority of the models with fundamentals are able to beat the RW model in forecasting the UK/US exchange rate. Second, the most accurate forecasts of the UK/US exchange rate are obtained with a nonlinear model. Third, taking into account structural breaks reveals that the Divisia aggregate performs better than its Simple Sum counterpart. Finally, Divisia-based models provide more accurate forecasts than Simple Sum-based models provided they are constructed within a nonlinear framework.
AB - This paper compares the UK/US exchange rate forecasting performance of linear and nonlinear models based on monetary fundamentals, to a random walk (RW) model. Structural breaks are identified and taken into account. The exchange rate forecasting framework is also used for assessing the relative merits of the official Simple Sum and the weighted Divisia measures of money. Overall, there are four main findings. First, the majority of the models with fundamentals are able to beat the RW model in forecasting the UK/US exchange rate. Second, the most accurate forecasts of the UK/US exchange rate are obtained with a nonlinear model. Third, taking into account structural breaks reveals that the Divisia aggregate performs better than its Simple Sum counterpart. Finally, Divisia-based models provide more accurate forecasts than Simple Sum-based models provided they are constructed within a nonlinear framework.
UR - http://www.scopus.com/inward/record.url?scp=78650051271&partnerID=8YFLogxK
UR - http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9485.2010.00538.x/abstract
U2 - 10.1111/j.1467-9485.2010.00538.x
DO - 10.1111/j.1467-9485.2010.00538.x
M3 - Article
SN - 0036-9292
VL - 58
SP - 127
EP - 152
JO - Scottish Journal of Political Economy
JF - Scottish Journal of Political Economy
IS - 1
ER -