Why is it so difficult to outperform the random walk in exchange rate forecasting?

Applied Economics

Volumn 45, Issue 23, 2013, Pages 3340-3346

  Forecasting, Imad ^a  

^a RMIT UNIVERSITY   (Australia)

Author keywords

Direction accuracy; Exchange rate models; Forecasting; Random walk

Indexed keywords

ACCURACY ASSESSMENT; ERROR ANALYSIS; EXCHANGE RATE; FORECASTING METHOD; PROFITABILITY; RANDOM WALK METHOD;

EID: 84865708462     PISSN: 00036846     EISSN: 14664283     Source Type: Journal    
DOI: 10.1080/00036846.2012.709605     Document Type: Article

References (19)

1. Ashley, R., Granger, C. W. J. and Schmalensee, R. (1980) Advertising and aggregate consumption: an analysis of causality, Econometrica, 48, 1149-67.
2. Bacchetta, P. and van Wincoop, E. (2006) Can information heterogeneity explain the exchange rate determination puzzle?, American Economic Review, 96, 552-76.
3. Corte, P. D., Sarno, L. and Tsiakas, I. (2009) An economic evaluation of empirical exchange rate models, CEPR Discussion Papers, No. DP6598. Available at SSRN: http://ssrn.com/abstract=1140527 (accessed 9 July 2012).
4. De Grauwe, P. and Grimaldi, M. (2006) The Exchange Rate in a Behavioral Finance Framework, Princeton University Press, Princeton, NJ.
5. Evans, M. D. and Lyons, R. K. (2002) Order flow and exchange rate dynamics, Journal of Political Economy, 110, 170-80.
6. Fildes, R. and Makridakis, S. (1995) The impact of empirical accuracy studies on time series analysis and forecasting, International Statistical Review, 63, 289-308.
7. Frankel, J. A. and Rose, A. K. (1995) Empirical research on nominal exchange rates, in Handbook of International Economics, Vol. 3 (Eds) G. M. Grossman and K. Rogoff, Elsevier, Amsterdam, pp. 1689-729.
8. Granger, C. W. J. (1990) Modelling Economic Time Series: Readings in Econometric Methodology, Oxford University Press, Oxford.
9. Inoue, A. and Killian, L. (2002) In-sample or out-of-sample tests of predictability: which one should we use?, Working Papers Series, No. 195, European Central Bank.
10. Kilian, L. and Taylor, M. P. (2003) Why is it so difficult to beat the random walk forecast of exchange rates?, Journal of International Economics, 60, 85-107.
11. Leitch, G. and Tanner, J. E. (1991) Economic forecast evaluation: profits versus the conventional error measures, American Economic Review, 81, 580-90.
12. MacDonald, R. and Taylor, M. P. (1992) Exchange rate economics: a survey, Interactional Monetary Fund Staff Papers, 39, 1-57.
13. Meese, R. (1990) Currency fluctuations in the post-Bretton Woods era, Journal of Economic Perspectives, 4, 117-34.
14. Meese, R. and Rogoff, K. (1983) Empirical exchange rate models of the seventies: do they fit out of sample?, Journal of International Economics, 14, 3-24.
15. Moosa, I. A. (2008) Risk and return in carry trade, Journal of Financial Transformation, 22, 8-13.
16. Moosa, I. A. and Burns, K. (2012) Can exchange rate models outperform the random walk? Magnitude, direction and profitability as criteria, Economia Internazionale, forthcoming.
17. Sarno, L. and Taylor, M. P. (2002) The Economics of Exchange Rates, Cambridge University Press, Cambridge.
18. Tashman, L. J. (2000) Out-of-sample tests of forecasting accuracy: an analysis and review, International Journal of Forecasting, 16, 437-50.
19. Taylor, M. P. (1995) The economics of exchange rates, Journal of Economic Literature, 33, 13-47.