CHAPTER V FORECASTING EXCHANGE RATES I. Forecasting ...

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CHAPTER V FORECASTING EXCHANGE RATES One of the goals of studying the behavior of EXCHANGE RATES is to be able to forecast EXCHANGE RATES . Chapters III and IV introduced the main theories used to explain the movement of EXCHANGE RATES . These theories fail to provide a good approximation to the behavior of EXCHANGE RATES . FORECASTING EXCHANGE RATES , therefore, seems to be a difficult task. This CHAPTER analyzes and evaluates the different methods used to forecast EXCHANGE RATES . This CHAPTER closes with a discussion of EXCHANGE rate volatility. I. FORECASTING EXCHANGE RATES International transactions are usually settled in the near future.

1.A.1 Fundamental Approach: Forecasting at Work The fundamental approach starts with a model, which produces a forecasting equation. This model can be based on theory, say PPP, a combination of theories or on the ad-hoc experience of a practitioner. Based on this first step, a forecaster collects data to estimate the forecasting equation.

  Forecasting