A Markov-switching model is lit for I8 exchange rates at quarterly frequencies. The model fits well in-sample for many exchange rates. By the mean-squared-error criterion, the Markov model does not generate superior forecasts to a random walk or the forward rate. There appears to be some evidence that the forecasts of the Markov model are superior at predicting the direction of change of the exchange rate.
Researchers also experimented with variants of the Markov switching model in the foreign exchange market and found supporting evidence for its superior predictive power on the direction of change for exchange rates REF .
Can the Markov switching model forecast exchange rates?
Journal of International Economics
Journal of International Economics
Economics Mathematics