Forecasting Foreign Exchange Rates: A Pedagogical Note

Extensive efforts have been made to forecast changes in exchange rates. The widespread availability of computer facilities has promoted the development and use of forecasting models. Such models can be either extrinsic (based on relationships of foreign exchange rate with other variables) or intrins...

Full description

Saved in:
Bibliographic Details
Published in:Journal of world business : JWB 1981-07, Vol.16 (2), p.53
Main Authors: Dufey, Gunter, Mirus, Rolf
Format: Article
Language:English
Subjects:
Accuracy
Financial management
Forecasting techniques
Forecasts
Foreign exchange rate risk
Foreign exchange rates
Forward exchange
International finance
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Extensive efforts have been made to forecast changes in exchange rates. The widespread availability of computer facilities has promoted the development and use of forecasting models. Such models can be either extrinsic (based on relationships of foreign exchange rate with other variables) or intrinsic (based on past values of foreign exchange rate). Extrinsic models can be divided into 3 broad subgroups: 1. balance of payments models, 2. aggregate demand models, 3. monetary models. These models depend upon the predictability of government intervention. That predictability is decreasing under the system of flexible exchange rates, so attention has turned to the intrinsic models. Intrinsic models include time series models, such as Box-Jenkins, and ''momentum models.'' A useful forecast would predict the direction of an exchange rate movement, the size of the profits relative to alternatives, and the risk of such investments. Evidence indicates substantial risks with commercial forecasts, given the preliminary nature of the performance evaluation and the unsettled theoretical issue of the nature of the bias separating the forward rate from the expected spot rate.
ISSN:1090-9516
1878-5573