Transcription of CHAPTER V FORECASTING EXCHANGE RATES I. Forecasting ...
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CHAPTER V FORECASTING EXCHANGE RATES I. Forecasting ...
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. EXCHANGE rate forecasts are necessary to evaluate the foreign denominated cash flows involved in international transactions. Thus, EXCHANGE rate FORECASTING is very important to evaluate the benefits and risks attached to the international business environment.
In general, practitioners will divide the sample in two parts: a longer sample (estimation period) and a shorter sample (validation period). The estimation period is used to select the model and to estimate its parameters. Suppose we are interested in one-step-ahead forecasts. The one-step-
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