Cointegration, error-connection models and forecasting using realigned foreign exchange rates

Nathan Lael Joseph

Research output: Contribution to journalArticle

Abstract

This study employs error-correction models (ECMs) to forecast foreign exchange (FX) rates where the data-sampling procedures are consistent with the rules governing the settlement (delivery) of FX contracts in the FX market. The procedure involves thatching (aligning) the forward rate to the 'actual' realized (future) spot rate at the settlement (delivery) date. This approach facilitates the generation of five different sets of sub samples of FX rate series for each currency. For comparative purposes, non-aligned month-end rates are also examined. The results indicate that the moments of the realized forecast errors for the same currency are not similar. Further, the ECMs derived are unstable, and their forecasting performance vary. The forecasting performance of the ECMs appear to be affected by the choice of the interval in which the sets of sub samples are observed. These results are attributed to the observed seasonal variation in FX rates.
Original languageEnglish
Pages (from-to)499-522
Number of pages24
JournalJournal of Forecasting
Volume14
Issue number6
DOIs
Publication statusPublished - Nov 1995

Keywords

  • unbiased ness hypothesis
  • unit roots
  • co integration
  • error-correction models
  • forecasting

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