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Title: Exchange Rates and Fundamentals: Evidence on the Economic Value of Predictability
Authors: Abhyankar, Abhay
Sarno, Lucio
Valente, Giorgio
First Published: 28-Dec-2004
Citation: Journal of International Economics, 2005, 66 (2), pp.325-348
Abstract: A major puzzle in international finance is the well-documented inability of models based on monetary fundamentals to produce better out-of-sample forecasts of the nominal exchange rate than a naive random walk. While this literature has generally employed statistical measures of forecast accuracy, we investigate whether there is any economic value to the predictive power of monetary fundamentals for the exchange rate. We find that, in the context of a simple asset allocation problem, the economic value of exchange rate forecasts from a fundamentals model can be greater than the economic value of random walk forecasts across a range of horizons.
ISSN: 0022-1996
Type: Article
Appears in Collections:Published Articles, Dept. of Economics

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