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Forecast Evaluation of Nonlinear Models: The Case of Long-Span Real Exchange Rates

✍ Scribed by Efthymios G. Pavlidis; Ivan Paya; David A. Peel

Publisher
John Wiley and Sons
Year
2011
Tongue
English
Weight
133 KB
Volume
31
Category
Article
ISSN
0277-6693

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✦ Synopsis

ABSTRACT

This paper deals with the nonlinear modeling and forecasting of the dollar–sterling and franc–sterling real exchange rates using long spans of data. Our contribution is threefold. First, we provide significant evidence of smooth transition dynamics in the series by employing a battery of recently developed in‐sample statistical tests. Second, we investigate the small‐sample properties of several evaluation measures for comparing recursive forecasts when one of the competing models is nonlinear. Finally, we run a forecasting race for the post‐Bretton Woods era between the nonlinear real exchange rate model, the random walk, and the linear autoregressive model. The nonlinear model outperforms all rival models in the dollar–sterling case but cannot beat the linear autoregressive in the franc–sterling. Copyright © 2011 John Wiley & Sons, Ltd.

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