NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Can the Markov Switching Model Forecast Exchange Rates?

Charles Engel

NBER Working Paper No. 4210 (Also Reprint No. r1882)
Issued in November 1992
NBER Program(s):   IFM

A Markov-switching model is fit for eighteen exchange rates at quarterly and monthly frequencies. This model fits well in-sample at the quarterly frequency for many exchange rates. By the mean-squared-error or mean-absolute-error criterion. the Markov model does not generate superior forecasts at a random walk or at the forward rate. There appears to be some evidence that the forecast of the Markov model are superior at predicting the direction of change of the exchange rate.

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Document Object Identifier (DOI): 10.3386/w4210

Published: Journal of International Economics. vol. 36, pp. 151-165. 1994

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