Model instability in predictive exchange rate regressions

Hauzenberger, Niko; Huber, Florian

doi:10.1002/for.2620

Cited by 6 publications

(8 citation statements)

References 61 publications

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“…Also, for Japan we observe a substantial deviation from the prediction in 1995 when short‐term interest rates fell to very low levels (to 0.4% in September 1995). These results are in line with Huber () and Hauzenberger and Huber () providing evidence for switching policy rules in exchange rate models when interest rates are constrained by the effective lower bound.…”

Section: Empirical Findingssupporting

confidence: 89%

“…Second, we take into account changes in the policy rule to explain exchange rate fluctuations. Huber () and Hauzenberger and Huber () show that changes in policy rules can explain exchange rate fluctuations in particular during the low inflation period and since the financial crisis. Most studies implicitly assume a constant inflation target (see, for example, Molodtsova and Papell ).…”

Section: Introductionmentioning

confidence: 99%

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Trend Fundamentals and Exchange Rate Dynamics

Huber

Kaufmann

2020

Economica

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We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US dollar. The empirical model is based on the assumption that two countries’ monetary policy strategies may be well described by Taylor rules with a time‐varying inflation target, a time‐varying natural rate of unemployment, and interest rate smoothing. Compared to the existing literature, our model simultaneously provides estimates of the latent components included in a typical Taylor rule specification and the model‐based real exchange rate. Our estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered, outperforming a benchmark model that does not account for changes in trend inflation and trend unemployment. More precisely, the proposed approach improves on competing models in tracking the actual evolution of the real exchange rate in terms of simple correlations while it appreciably improves on simpler competitors in terms of matching the persistence of the real exchange rate.

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Section: Empirical Findingssupporting

confidence: 89%

Section: Introductionmentioning

confidence: 99%

Trend Fundamentals and Exchange Rate Dynamics

Huber

Kaufmann

2020

Economica

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“…Also, these Monte Carlo models need less time to make the estimates, especially in the case of the AFQMC method. Hence, these results also show great computing of popular FOREX market models that previous literature showed as difficult to estimate accurately, reducing the instability of the previous literature (Jaworski, 2018;Dash, 2018;Cheung et al, 2019;Hauzenberger and Huber, 2019;Colombo and Pelagatti, 2020). These results can be very useful in their application in FOREX market models and in other models in Financial Econometrics that help the valuation challenges of financial professionals and other related interest groups.…”

supporting

confidence: 53%

“…They got an overall standard deviation superior to 1.06 in their estimates. Finally, Hauzenberger and Huber (2019) applied the Markov process of Time-Varying transition to forecast the FOREX market for Japan, Norway, Australia, Switzerland, Canada, Sweden, South Korea, and the UK relative to the US dollar. They reached an average deviation of 0.94.…”

mentioning

confidence: 99%

Quantum Monte Carlo simulations for estimating FOREX markets: a speculative attacks experience

Alaminos

Salas

Fernández-Gámez

2023

Humanit Soc Sci Commun

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The foreign exchange markets, renowned as the largest financial markets globally, also stand out as one of the most intricate due to their substantial volatility, nonlinearity, and irregular nature. Owing to these challenging attributes, various research endeavors have been undertaken to effectively forecast future currency prices in foreign exchange with precision. The studies performed have built models utilizing statistical methods, being the Monte Carlo algorithm the most popular. In this study, we propose to apply Auxiliary-Field Quantum Monte Carlo to increase the precision of the FOREX markets models from different sample sizes to test simulations in different stress contexts. Our findings reveal that the implementation of Auxiliary-Field Quantum Monte Carlo significantly enhances the accuracy of these models, as evidenced by the minimal error and consistent estimations achieved in the FOREX market. This research holds valuable implications for both the general public and financial institutions, empowering them to effectively anticipate significant volatility in exchange rate trends and the associated risks. These insights provide crucial guidance for future decision-making processes.

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“…, N, equals zero in the period before the GFC (up to 2008Q4) while being equal to unity in its aftermath (starting from 2009Q1). 4With more than two regimes, an alternative would be a logit specification (Kaufmann, 2015;Billio et al, 2016;Hauzenberger and Huber, 2020).…”

Section: An Endogenous Mechanism For the State Allocationmentioning

confidence: 99%

The impact of macroprudential policies on capital flows in CESEE

Eller

Hauzenberger

Huber

et al. 2021

Journal of International Money and Finance

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In line with the recent policy discussion on the use of macroprudential measures to respond to crossborder risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) -a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regimeswitching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control -besides domestic macroeconomic quantities -for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.

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Model instability in predictive exchange rate regressions

Cited by 6 publications

References 61 publications

Trend Fundamentals and Exchange Rate Dynamics

Trend Fundamentals and Exchange Rate Dynamics

Quantum Monte Carlo simulations for estimating FOREX markets: a speculative attacks experience

The impact of macroprudential policies on capital flows in CESEE

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