TY  - JOUR
AU  - Clarida,Richard
AU  - Sarno,Lucio
AU  - Taylor,Mark
AU  - Valente,Giorgio
TI  - The Out-of-Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8601
PY  - 2001
Y2  - November 2001
UR  - http://www.nber.org/papers/w8601
L1  - http://www.nber.org/papers/w8601.pdf
N1  - Author contact info:
Richard H. Clarida
Columbia University
420 West 118th Street
Room 1111, IAB
New York, NY  10027
Tel: 212/854-3676
Fax: 212/854-8059
E-Mail: rhc2@columbia.edu

Lucio Sarno
Cass Business School
106 Bunhill Row
London, EC1Y 8TZ, UK
United Kingdom
E-Mail: lucio.sarno@city.ac.uk

Mark P. Taylor
Office of the Dean
Warwick Business School
University of Warwick
Coventry CV4 7AL
UNITED KINGDOM
E-Mail: mark.taylor@warwick.ac.uk

Giorgio Valente
Department of Finance
Faculty of Business Administration
the Chinese University of Hong Kong
Shatin, N.T.
Hong Kong
Tel: (852) 2609 7443
Fax: (852) 2603  6586
E-Mail: valente@baf.msmail.cuhk.edu.hk
AB  - A large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate. However, there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities. This paper proposes a term-structure forecasting model of exchange rates based on a regime-switching vector equilibrium correction model which is novel in this context. Our model significantly outperforms both a random walk and a linear term-structure vector equilibrium correction model for four major dollar rates across a range of horizons.
ER  -