Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting
Abstract
This paper compares the true, ex-ante forecasting performance of a micro-based model against both a standard macro model and a random walk. In contrast to existing literature, which is focused on longer horizon forecasting, we examine forecasting over horizons from one day to one month (the one-month horizon being where micro and macro analysis begin to overlap). Over our 3-year forecasting sample, we find that the micro-based model consistently out-performs both the random walk and the macro model. Micro-based forecasts account for almost 16 per cent of the sample variance in monthly spot rate changes. These results provide a level of empirical validation as yet unattained by other models. Though our micro-based model out-performs the macro model, this does not imply that past macro analysis has overlooked key fundamentals: our structural interpretation using a fundamentals-based model shows that our findings are consistent with exchange rates being driven by standard fundamentals.
Discipline(s)
Finance and Financial Management
Recommended Citation
Evans, Martin D. and Lyons, Richard K., "Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting" (2005). CRIF Seminar series. Paper 10.
http://fordham.bepress.com/crif_seminar_series/10
