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Investing under model uncertainty: decision based evaluation of exchange rate forecasts in the US, UK and Japan

Garratt, Anthony and Lee, K. (2010) Investing under model uncertainty: decision based evaluation of exchange rate forecasts in the US, UK and Japan. Journal of International Money & Finance 29 (3), pp. 403-422. ISSN 0261-5606.

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Official URL: http://dx.doi.org/10.1016/j.jimonfin.2009.07.002

Abstract

We evaluate the forecast performance of a range of theory-based and atheoretical models explaining exchange rates in the US, UK and Japan. A decision-making environment is fully described for an investor who optimally allocates portfolio shares to domestic and foreign assets. Methods necessary to compute and use forecasts in this context are proposed, including the means of combining density forecasts to deal with model uncertainty. An out-of-sample forecast evaluation exercise is described using both statistical criteria and decision-based criteria. The theory-based models are found to perform relatively well when their forecasts are judged by their economic value.

Item Type: Article
Keyword(s) / Subject(s): Exchange rates, investment strategies, forecast evaluation, model averaging
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 18 Nov 2010 12:01
Last Modified: 10 Jul 2013 13:05
URI: http://eprints.bbk.ac.uk/id/eprint/1936

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