A stochastic approach to modelling the USD/AUD exchange rate: Implications for managing foreign exchange exposure
Purpose - To develop all integrated approach to forecasting spot foreign exchange rates byincorporating some principles underlying long-term dependence.Design/methodology/approach - The paper utilises the random-walk framework to develop astochastic forecast model wherein the sign (positive or negative) and magnitude (strong or weak) ofdependence can be separately controlled. The integrated model demonstrates superior forecastperformance over a conventional random walk.Findings - Using spot log prices and log price changes (returns) for the USD/AUD exchange rate, theinitial outcomes of the study suggest that a priori knowledge of the underlying sign and magnitude oflong-term dependence yields out-of-sample forecasts superior to those of a random walk model.Research limitations/implications - Independent assessment of the contribution to forecastaccuracy of controlling for the sign of dependence between successive price changes only shows littleadditional improvement in out-of-sample forecast performance over the random walk null.Practical implications - The findings of the study have important ramifications for managerialfinance as they provide important insights on expected future currency returns with potentialadvantages in currency hedging and/or timing of international capital flows.Originality/value - The contribution of this paper is to develop an original forecast model explicitlyincorporating the conceptual and theoretical characteristics of long-term dependent time series. Byseparating the key characteristics and modelling each individually, the contribution of each to forecastaccuracy can be evaluated.
Year of publication: |
2006
|
---|---|
Authors: | Wilson Patrick ; Ellis Craig |
Publisher: |
Emerald Group Publishing |
Saved in:
freely available
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