Fundamentals, regimes and exchange rate forecasts: Insights from a meta exchange rate model

Aristidou, Chrystalleni; Lee, Kevin; Shields, Kalvinder

Abstract

A ‘meta’ model of the exchange rate combines a range of models distinguished by the drivers of the rate and by regime duration. Alternative model weights are proposed, including those obtained from a novel non-nested hypothesis-testing technique that accommodates periods of stability and slowly-evolving or abruptly-changing regimes involving multiple drivers. Focusing on density forecasts, the meta models perform well, demonstrating that all the sets of fundamentals considered can be useful for forecasting when the model is estimated over an appropriate time frame, but that the ability to exploit the changing relevance of different sets of fundamentals over time is important too.

Citation

Aristidou, C., Lee, K., & Shields, K. (2022). Fundamentals, regimes and exchange rate forecasts: Insights from a meta exchange rate model. Journal of International Money and Finance, 123, Article 102601. https://doi.org/10.1016/j.jimonfin.2022.102601

• Journal Article Type: Article
• Acceptance Date: Jan 14, 2022
• Online Publication Date: Jan 21, 2022
• Publication Date: 2022-05
• Deposit Date: Jan 31, 2022
• Publicly Available Date: Jan 22, 2024
• Journal: Journal of International Money and Finance
• Print ISSN: 0261-5606
• Electronic ISSN: 1873-0639
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 123
• Article Number: 102601
• DOI: https://doi.org/10.1016/j.jimonfin.2022.102601
• Keywords: Economics and Econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/7369889
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0261560622000043?via%3Dihub