Prague Economic Papers 2016, 25(5):527-546 | DOI: 10.18267/j.pep.581

Exchange Rates Forecasting: Can Jump Models Combined with Macroeconomic Fundamentals Help?

Tomáš Bunčák
The Masaryk Institute of Advanced Studies, Czech Technical University in Prague, Prague, Czech Republic (tomas.buncak@cvut.cz).

Connection between macroeconomic variables and foreign exchange (FX) rates evaluated in the context of out-of-sample forecasting is a well-known problem in economics. We propose a method that utilizes stochastic models based on jump processes (namely the normal inverse Gaussian and Meixner models), combines them with macroeconomic fundamentals, and using a moving (rolling or recursive) regularized estimation procedure produces forecasts of FX rates. These are compared to benchmark models, namely the direct forecast and the Gauss model forecast. Empirical out-of-sample experiments are performed on EUR/USD and USD/DKK currencies.

Keywords: cross-validation, out-of-sample testing, macroeconomic fundamentals, jump processes, exchange rates forecasting
JEL classification: C46, C53, F37

Published: January 1, 2016  Show citation

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Bunčák, T. (2016). Exchange Rates Forecasting: Can Jump Models Combined with Macroeconomic Fundamentals Help? Prague Economic Papers, 25(5), 527-546. doi: 10.18267/j.pep.581
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