Long-Horizon Exchange Rate Predictability?
Abstract: Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. We show that such a procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates and diagnostic statistics suggest a high degree of predictability of the dependent variable. We apply a simple modification of the long-horizon regression due to Jegadeesh (1991), which may provide more accurate inferences for researchers interested in comparing short and long-run predictability of U.S. dollar exchange rates.
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/1996/199639/199639pap.pdf
Part of Series: Finance and Economics Discussion Series
Pages: 17 pages