Models based on economic theory have serious problems at forecasting exchange rates better than simple univariate driftless random walk models, especially at short horizons. Multivariate time series models suffer from the same problem. In this paper, we propose to forecast exchange rates with a...

We compare a number of data-rich prediction methods that are widely used in macroeconomic forecasting with a lesser known alternative: partial least squares (PLS) regression. In this method, linear, orthogonal combinations of a large number of predictor variables are constructed such that the...