Finance and Economics Discussion Series (FEDS)
July 1997
Long-Horizon Exchange Rate Predictability?
Jeremy Berkowitz and Lorenzo Giorgianni
Abstract:
Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction regressions. We show that such a procedure gives rise to spurious evidence of predictive power. A simulation study demonstrates that even when using this technique on two independent series, estimates and diagnostic statistics suggest a high degree of predictability of the dependent variable. We apply a simple modification of the long-horizon regression due to Jegadeesh (1991), which may provide more accurate inferences for researchers interested in comparing short and long-run predictability of U.S. dollar exchange rates.
Full paper (892 KB Postscript)Keywords: Spurious, inference, long-run
PDF: Full Paper
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