evaluating forecasts from setar models of exchange rates we consider the forecasting performance of two setar exchange rate models proposed by krager and kugler j int money fin 12 1993 195 assuming that the models are good approximations to the data generating process we show that whether the non linearities inherent in the data can be exploited to forecast better than a random walk depends on both how forecast accuracy is assessed and on the state of nature evaluation based on traditional measures such as root mean squared forecast errors may mask the superiority of the non linear models generalized impulse response functions are also calculated as a means of portraying the asymmetric response to shocks implied by such models

testing for nonlinear dependence in daily foreign exchange rates the purpose of this article is to investigate whether daily changes in five major foreign exchange rates contain any nonlinearities although the data contain no linear correlation evidence indicates the presence of substantial nonlinearity in a multiplicative rather than additive form further examination reveals that a generalized autoregressive conditional heteroskedasticity model can explain a large part of the nonlinearities for all five exchange rates copyright 1989 by the university of chicago

nonlinear nonparametric nonessential exchange rate estimation a wide variety of empirical exchange rate mo dels have been estimated over the years but despite the considerable energies that have been devoted to this work the economics profession has remarkably little to show for itself there is little evidence that conclusively links the bilateral exchange rates of typical oecd countries to fundamental macroeconomic determinants of exchange rates such as money output relative prices or interest differentials coefficient estimates are notoriously unstable and frequently mis signed compared with theoretical predictions exchange rate equations do not fit particularly well and forecast no better than the simplest naive alternatives recently a new class of exchange rate models was introduced by paul krugman 1988 these models provide a potential reason for the poor performance of traditional exchange rate models because they are nonlinear if the exchange rate actually depends in a nonlinear way on exogenous macroeconomic fundamentals linear exchange rate models may work poorly even though the exchange rate is closely linked to fundamentals in this paper we provide a brief sketch of some of this work as well as some preliminary evidence on the actual performance of these nonlinear models in our empirical analysis we use a nonparametric estimator that can handle a wide variety of nonlinear phenomena we examine fixed exchange rate regimes where nonlinearities should be quite easy to detect however we do not find strong empirical support for the hypothesis that the incorporation of nonlinear effects significantly improves models of exchange rate determination in section i we briefly review the theoretical literature on nonlinear target zone exchange rate models linking this work to the tests for intrinsic bubbles we draw heavily on recent papers by kenneth froot and maurice obstfeld 1989a b our methodology and data are discussed in section ii section iii contains new empirical tests for nonlinearities in exchange rate models

a variance ratio test of random walks in foreign exchange rates the separate variance ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis using five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 the rejections cast doubt on the random walk hypothesis in exchange rates which has received support in the existing literature furthermore since the rejections are robust to heteroscedasticity they suggest autocorelations of weekly increments in the nominal exchange rate series which may be consistent with the exchange rate overshooting or undershooting phenomenon in the past decade there has been a consensus that nominal exchange rates follow a random walk process since a unit root and uncorrelated increments are both required for a random walk process the random walk is usually supported in the existing literature either because a unit root component is detected in the exchange rate series or because the increment in the exchange rate is found to be serially uncorrelated for example meese and singleton 1982 and baillie and bollerslev 1989 both find a unit root component in the exchange rate series and the evidence provided in giddy and dufey 1975 cornell and dietrich 1978 logue sweeney and willett 1978 and hsieh 1988 all suggest that the exchange rate series contains uncorrelated increments in this paper the random walk hypothesis for the nominal exchange rate series is reexamined by applying a variance ratio test developed in lo and mackinlay 1988 to five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 while there are two implications of the random walk unit root and uncorrelated increments this paper focuses on the uncorrelated increments aspect this is not only because there are some important departures from the random walk that unit root test cannot detect but also because the autocorrelation aspect may yield

nonlinearity and intraday efficiency tests on energy futures markets using high frequency data this paper first time comprehensively examines the intraday efficiency of four major energy crude oil heating oil gasoline natural gas futures markets in contrast to earlier studies which focus on in sample evidence and assume linearity the paper employs various nonlinear models and several model evaluation criteria to examine market efficiency in an out of sample forecasting context overall there is evidence for intraday market inefficiency of two of the four energy future markets heating oil and natural gas which exists particularly during the bull market condition but not during the bear market condition the evidence is also robust against the data snooping bias and the model overfitting problem and its economic significance can be very substantial

the temporal pattern of trading rule returns and exchange rate intervention intervention does not generate technical trading profits abstract this paper characterizes the temporal pattern of trading rule returns and official intervention for australian german swiss and u s data to investigate whether intervention generates technical trading rule profits the data reject the hypothesis that intervention generates inefficiencies from which technical rules profit in particular high frequency data show that abnormally high trading rule returns precede german swiss and u s intervention australian intervention precedes high trading rule returns but trading intervention patterns make it implausible that intervention actually generates those returns rather intervention responds to exchange rate trends from which trading rules have recently profited

the effectiveness of central bank intervention in the ems the post 1993 experience abstract we analyze the effectiveness of intervention in the european monetary system by using data on the dem intervention activity of six european central banks covering the period from august 1993 to april 1998 to allow for regime specific intervention effects we estimate markov switching autoregressive conditional heteroscedasticity models we find that interventions have only limited effects on the conditional means and variances

interest rate linkages in the eurocurrency market contemporaneous and out of sample granger causality tests abstract this paper examines linkages among major eurocurrency interest rates during 1994 2002 eurocurrency interest rate causal linkages are found to be much stronger with additional allowance for contemporaneous causality test results than the inference based solely on granger causality tests the impact of u s interest rates is clearly not dominant in the eurocurrency markets while the japanese interest rates are found to be quite influential german interest rates both cause and are caused by several other eurocurrency interest rates by contrast interest rates on the new currency the euro do not have a substantial influence on other eurocurrency interest rates which underscores its emerging status

do euro exchange rates follow a martingale some out of sample evidence abstract traditional autocorrelation and variance ratio tests are based on serial uncorrelatedness rather than martingale difference as such they do not capture potential nonlinearity in mean which could lead to misleading inferences in favor of the martingale hypothesis this paper employs various parametric and nonparametric nonlinear models as well as several model comparison criteria to examine the potential martingale behavior of euro exchange rates in the context of out of sample forecasts the overall evidence indicates that while martingale behavior cannot be rejected for euro exchange rates with major currencies such as the japanese yen british pound and us dollar there is nonlinear predictability in terms of economic criteria with respect to several smaller currencies

exchange rates and fundamentals new evidence from real time data abstract this paper analyses the link between economic fundamentals and exchange rates by investigating the importance of real time data we find that economic news in the united states germany and the euro area have been a driving force behind daily us dollar euro dem exchange rate developments in the period 1993 2003 the larger importance of us macroeconomic news is at least partly explained by their earlier release time compared to corresponding german and euro area news the exchange rate is also shown to respond more strongly to news in periods of large market uncertainty and when negative or large shocks occur overall the model based on real time data explains about 75 of the monthly directional changes of the us dollar euro exchange rate although it does not explain well the magnitude of the exchange rate changes

macroeconomic sources of foreign exchange risk in new eu members abstract we address the issue of foreign exchange risk and its macroeconomic determinants in several new eu members we derive the observable macroeconomic factors consumption and inflation using the stochastic discount factor sdf approach the joint distribution of excess returns in the foreign exchange market and the factors are modeled using a multivariate garch in mean specification our findings show that both real and nominal factors play important roles in explaining the variability of the foreign exchange risk premium both types of factors should be included in monetary general equilibrium models employed to study excess returns to contribute to the further stability of domestic currencies the new eu members should strive to implement stabilization policies aimed at achieving nominal as well as real convergence with the core eu members

all that s gold does not glitter spurred by economic uncertainty interest in precious metals has increased dramatically investors target precious metal funds for two primary reasons 1 to capture an expected appreciation in pr

a stochastic dominance analysis of yen carry trades abstract yen carry trades have made headline news for over a decade we examine the profitability of such trades for the period 2001 2009 yen carry trades generated high mean returns and sharpe ratios prior to the recent financial crisis they continued to outperform major stock markets for the full sample period given the non normality of carry trade returns we apply non parametric tests based on stochastic dominance sd to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on us and global stock market indices we apply a general test for sd developed recently by linton maasoumi and whang 2005 to six currencies as well as portfolios of these currencies for a large class of risk averse investors profits from yen carry trades cannot be attributed to risks

the width of the band and exchange rate mean reversion some further erm based results one key prediction of the target zone model is that the exchange rate should be mean reverting within the band in this paper we investigate this prediction by examining the time series characteristics of seven currencies participating in the exchange rate mechanism erm of the european monetary system both immediately before and after the introduction of wide exchange rate bands in 1993 using standard univariate unit root tests we find some evidence of mean reversion and this is much more pronounced using variance ratio test statistics it turns out that such mean reversion is as strong for the wide band erm as for the narrow band erm

trading rule profits in european currency spot cross rates abstract the moving average ma trading rule is applied to six european spot cross rates jy bp dm bp jy dm sf dm sf bp and jy sf to see if opportunities for profitable trading exist the results suggest that ma trading rules are marginally profitable only for the jy dm and the jy sf cross rates while trading rules are not profitable for the other four cross rates bootstrapping and out of sample tests provide similar results examination of subsamples characterized by central bank intervention do not produce different results computation of box pierce statistics adjusted for heteroscedasticity show that daily returns for all six cross rates are serially uncorrelated overall the results suggests that cross rates are sufficiently transparent to eliminate ma trading rule profit

some evidence of random walk behavior of euro exchange rates using ranks and signs abstract this study utilises recently developed tests based on ranks and signs in addition to the traditional variance ratio test to examine the behavior of euro exchange rates we show that adjustments for multiple tests must be employed in order to avoid size distortions overall such adjustments provide evidence consistent with random walk behavior of euro exchange rates

central bank intervention and trading rule profits in foreign exchange markets abstract moving average trading rules are utilized in both futures and spot foreign currency markets to show that significant positive profits can be earned in four of five currencies examined the results are consistent for both in sample and forward simulation tests regression results demonstrate that central bank intervention is strongly associated with the profitability of trading returns for the three major currencies dm yen and pound and partially explains returns for the sf and cd consistent with conjectures in previous studies that news concerning intervention tends to be revealed over weekends we find that moving average trading rule returns are significantly positive on fridays and mondays and not significantly different from zero in the middle of the week

contesting a place in the sun on ideologies in foreign markets and liabilities of origin this paper explores the role of ideology in attempts to influence public policy and in business representation in the eu china solar panel anti dumping dispute it exposes the dynamics of international activity by emerging economy multinationals in this case from china and their interactions in a developed country context the eu theoretically the study also sheds light on the recent notion of liability of origin in addition to the traditional concept of liability of foreignness explored in international business research in relation to firms market and political strategies and their institutional embeddedness in home and host countries through a qualitative analysis of primary and secondary materials and interview data with key protagonists we provide a detailed evolution of the case the key actors involved and their positions arguments and strategies this illustrates the complexities involved in the interaction between markets and ideologies in the midst of debates regarding different forms of subsidy regimes for renewable energy free trade versus protectionist tendencies by governments and the economic and sustainability objectives of firms and societies the case shows how relative newcomers to the eu market responded to overcome a direct threat to their business and became with support from their home government active participants in the public debate through interactions with local commercial partners and non governmental organisations firms adopted relatively sophisticated strategies to reduce their liabilities vis a vis host country institutions and local stakeholders including collective action to increase their legitimacy and reputation and counter ideologically based attacks we also discuss implications and limitations

linear non linear and essential foreign exchange rate prediction with simple technical trading rules abstract this paper investigates the predictability of spot foreign exchange rate returns from past buy sell signals of the simple technical trading rules by using the nearest neighbors and the feedforward network regressions the optimal choices for nearest neighbors hidden units in a feedforward network and the training set are determined by the cross validation method which minimizes the mean square error although this method is computationally expensive the results indicate that it has the advantage of avoiding overfitting in noisy environments and indicate that simple technical rules provide significant forecast improvements for the current returns over the random walk model

implications of nonlinear dynamics for financial risk management this paper demonstrates that when log price changes are not iid their conditional density may be more accurate than their unconditional density for describing short term behavior using the bds test of independence and identical distribution daily log price changes in four currency futures contracts are found to be not iid while there appear to be no predictable conditional mean changes conditional variances are predictable and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution based on this model daily log price changes are decomposed into a predictable part which is described parametrically by the autoregressive volatility model and an unpredictable part which can be modeled by an empirical density either parametrically or nonparametrically this two step seminonparametric method yields a conditional density for daily log price changes which has a number of uses in financial risk management

is technical analysis in the foreign exchange market profitable a genetic programming approach using genetic programming techniques to find technical trading rules we find strong evidence of economically significant out of sample excess returns to those rules for each of six exchange rates over the period 1981 1995 further when the dollar deutsche mark rules are allowed to determine trades in the other markets there is significant improvement in performance in all cases except for the deutsche mark yen betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk bootstrapping results on the dollar deutsche mark indicate that the trading rules detect patterns in the data that are not captured by standard statistical models

meese rogoff redux micro based exchange rate forecasting meese rogoff redux micro based exchange rate forecasting by martin d d evans and richard k lyons this paper compares the true ex ante fore casting 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 over lap over our three year forecasting sample we find that the micro based model consistently outperforms both the random walk and the macro model micro based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes these results pro vide a level of empirical validation as yet unat tained by other models the forecasting experiment proposed by richard meese and kenneth rogoff 1983 re mains a benchmark against which exchange rate models are judged their result that structural macro models cannot outperform a naive random walk has proved robust over the decades yet the meese rogoff paper was never about forecasting in the true sense i e using tirrie f information to forecast exchange rates at t 1 b y using concurrent realized values of the forcing variables their regressions were more about concurrent explanation than about ex ante forecasting their only forecast ing element is in their reliance on ex ante data to estimate equation parameters which appro priately penalized models whose estimated pa rameters were unstable tion for the random walk nature of exchange rates is that there exists some unobserved fun damental that itself follows a random walk un observed being important because fundamentals proposed in most macro models do not follow random walks they offer a different explana tion one rooted in the asset approach to ex change rates and the present value relation that follows from it specifically they show that i f fundamentals are 1 1 but not necessarily ran dom walks then as the discount factor in the present value relation approaches 1 the ex change rate will follow a process arbitrarily close to a random walk intuitively given that an 1 1 process can be split into random walk and stationary components a discount factor near 1 means that most all of the weight is placed on fundamentals far into the future ex pectations of which are dominated by the random walk component charles engel and kenneth west 2004 2005 provide a valuable perspective on the forecastability of exchange rates one explana this paper takes the analysis of engel and west as an important reorientation of thinking and brings it to the natural next step specifi cally if there is little room for forecasting based on stationary components of fundamentals then one needs to focus on where all the action is namely exchange rate dynamics that come from expectational surprises though the sur prise part is by definition orthogonal to public information our micro based model shows that there should exist types of nonpublic infor mation that are useful for forecasting this part and where to look for these types of informa tion we then locate data on these types of nonpublic information and test whether they have true ex ante forecasting power we should evans department of economics georgetown uni versity washington dc 20057 and nber lyons haas school of business university of california berkeley c a 94720 1900 and nber we are grateful to ken west for his comments and to the national science foundation for financial support we refrain from using the word news because it has too strong an association with macro information that is public which even in the most careful of event studies explains less than 5 percent of exchange rate variation in total see torben andersen et al 2003