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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page 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.

Keywords: Spurious, inference, long-run

Full paper (209 KB PDF) | Full paper (892 KB Postscript)

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Last update: July 16, 1997