Modeling and Forecasting Exchange-Rates With a Bayesian Time-Varying Coefficient Model
Title: Modeling and Forecasting Exchange-Rates With a Bayesian Time-Varying Coefficient Model
Author: CANOVA, Fabio
Citation: Journal of Economic Dynamics & Control, 1993, 17, 01-feb, 233-261
This paper employs a multivariate Bayesian time-varying coefficients (TVC) approach to model and forecast exchange rate data. It is shown that, if used as a data-generating mechanism, a TVC model induces nonlinearities in the conditional moments and leptokurtosis in the unconditional distribution of the series. It is also shown that leptokurtic behavior disappears under time aggregation. As a forecasting device, a Bayesian TVC model improves over a random walk model. The improvements are robust to several changes in the forecasting environment.
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