On the Sources of Uncertainty in Exchange Rate Predictability

Joseph Paul Byrne, Dimitris Korobilis, Pinho J. Ribeiro

Research output: Contribution to journalArticle

16 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)329–357
Number of pages29
JournalInternational Economic Review
Volume59
Issue number1
Early online date31 Jan 2018
DOIs
Publication statusPublished - Feb 2018

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