Transcription of 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.
sample forecasting errors. On the other hand, out-of-sample forecasting attempts to use today’s information to forecast the future behavior of exchange rates. That is, we forecast the path of exchange rates outside of our sample. In general, at time t, it is very unlikely that we know the inflation rate for time t+1. That is,
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