for - Forecasting exchange rates Very poor performance in...

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Forecasting exchange rates
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Very poor performance in the area of exchange rate forecasting
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1. Why is it critical to have good exchange rate forecasts? There is a wide range of decision problems for which exchange rate forecasting is central. - the microeconomic level the decision problems of individual investors considering to purchase/sell foreign currency denominated assets. - the monetary policy decisions based on (implicit or explicit) inflation targeting.
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2. Why economists forecasting exchange rates have not been able to match the advances in weather forecasting made by meteorologists ? more subtle answer next I will shortly describe current state-of- the-art methods for exchange rate forecasting
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1. “Random walk” forecasts all contemporaneously available information about future exchange rate movements is reflected in the current value of the exchange rate, and that all future events leading to future exchange rate movements are purely random from the perspective of today. the best forecast of the exchange rate at any future date is then today’s value. The simplest forecast with a poor a forecasting performance, “random walk” forecasts of the fluctuations of major currencies have in practice been rather hard to beat.
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2. A second class of exchange rate forecasts is
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This note was uploaded on 04/14/2010 for the course ECON 351 taught by Professor Prodan during the Spring '10 term at University of Alabama - Huntsville.

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for - Forecasting exchange rates Very poor performance in...

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