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Evaluating forecasts from SETAR models of exchange rates

Clements, M. and Smith, J. (2001) Evaluating forecasts from SETAR models of exchange rates. Journal of International Money and Finance, 20. pp. 133-148. ISSN 0261-5606

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To link to this item DOI: 10.1016/S0261-5606(00)00039-5


We consider the forecasting performance of two SETAR exchange rate models proposed by Kräger and Kugler [J. Int. Money Fin. 12 (1993) 195]. Assuming that the models are good approximations to the data generating process, we show that whether the non-linearities inherent in the data can be exploited to forecast better than a random walk depends on both how forecast accuracy is assessed and on the ‘state of nature’. Evaluation based on traditional measures, such as (root) mean squared forecast errors, may mask the superiority of the non-linear models. Generalized impulse response functions are also calculated as a means of portraying the asymmetric response to shocks implied by such models.

Item Type:Article
Divisions:Henley Business School > ICMA Centre
ID Code:35195
Uncontrolled Keywords:Exchange rate forecasts; Regime-switching models; Impulse responses

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