IDEAS home Printed from https://ideas.repec.org/p/men/wpaper/52_2015.html
   My bibliography  Save this paper

The Forecasting of Spot Exchange Rates Based on the Forward Exchange Rates

Author

Listed:
  • Radim Gottwald

    (Department of Finance, Faculty of Business and Economics, Mendel University in Brno)

Abstract

The forecasting power of forward exchange rates for future spot exchange rates has been investigated by many researchers. In this paper, the author focuses on this topical economic theme too, and investigates the extent, to which the future spot exchange rates could be forecasted based on the current forward exchange rates. The paper aims at an assessment of the forecasting of spot USD/EUR exchange rates based on the forward exchange rates in the period from 2005 to 2013. Graphical and regression analyses are used to investigate the relationship between daily closing spot and forward rates, namely between 3 month rates and 6 month rates. The ordinary least squares method is used in order to forecast the chosen parameters. Hypotheses related to these parameters are tested at a significance level of 5%. By means of the augmented Dickey-Fuller test for a unit root in a time series sample, the author investigates whether the time series of the parameters is stationary. Afterwards, the time series is detrended in order to guarantee stationarity. Transformation into a non-linear econometric model with integrated autoregressive process AR(1) is used in order to reduce high positive autocorrelation in the residuals of the model. Thereafter, forecasts of the detrended model are made. Results revealed the following findings. According to the graphical analysis, the current forward exchange rates probably cannot be considered sufficiently reliable forecasters of the future spot exchange rates. According to the regression analysis, the forward forecasts even systematically undervalue the future spot exchange rates. Summarized, the current forward exchange rates cannot be considered sufficiently reliable forecasters of the future spot exchange rates. The above-mentioned findings are important for financial analysts working in financial companies or enterprises, which import or export some products, thus trading with foreign business partners using foreign currencies. Speculators on foreign exchange markets could make use of the presented findings as well.

Suggested Citation

  • Radim Gottwald, 2015. "The Forecasting of Spot Exchange Rates Based on the Forward Exchange Rates," MENDELU Working Papers in Business and Economics 2015-52, Mendel University in Brno, Faculty of Business and Economics.
    • Handle: RePEc:men:wpaper:52_2015
    as

    Download full text from publisher

    File URL: http://ftp.mendelu.cz/RePEc/men/wpaper/52_2015.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dal Bianco, Marcos & Camacho, Maximo & Perez Quiros, Gabriel, 2012. "Short-run forecasting of the euro-dollar exchange rate with economic fundamentals," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 377-396.
    2. L Bonga-Bonga, 2009. "Forward Exchange Rate Puzzle: Joining the Missing Pieces in the Rand-US Dollar Exchange Market," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 33(2), pages 33-48, August.
    3. HeeJoon Kang, 1992. "Forward exchange rates as unbiased predictors of future spot rates a review and re-interpretation," Open Economies Review, Springer, vol. 3(2), pages 215-232, June.
    4. Jian Wang, 2008. "Why are exchange rates so difficult to predict?," Economic Letter, Federal Reserve Bank of Dallas, vol. 3(jun).
    5. Neslihan Topbas, 2014. "Tests of Rationality in Turkish Foreign Exchange Market," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(2), pages 65-78.
    6. Rizwana Bashir & Rabia Shakir & Badar Ashfaq & Atif Hassan, 2014. "The Efficiency of Foreign Exchange Markets in Pakistan: An Empirical Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 133-149, Jan-June.
    7. Nath, Golaka, 2013. "The Spot Forward Exchange Rate Relation in Indian Foreign Exchange Market - An Analysis," MPRA Paper 51591, University Library of Munich, Germany.
    8. Josef Taušer & Petr Buryan, 2011. "Exchange Rate Predictions in International Financial Management by Enhanced GMDH Algorithm," Prague Economic Papers, Prague University of Economics and Business, vol. 2011(3), pages 232-249.
    9. Christian Wolff, 2000. "Forward foreign exchange rates and expected future spot rates," Applied Financial Economics, Taylor & Francis Journals, vol. 10(4), pages 371-377.
    10. Raj Aggarwal & Sijing Zong, 2008. "Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction," Multinational Finance Journal, Multinational Finance Journal, vol. 12(3-4), pages 241-277, September.
    11. Raj Aggarwal & Winston T. Lin & Sunil K. Mohanty, 2008. "Are Forward Exchange Rates Rational Forecasts of Future Spot Rates? An Improved Econometric Analysis for the Major Currencies," Multinational Finance Journal, Multinational Finance Journal, vol. 12(1-2), pages 1-20, March-Jun.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Imad A. Moosa, 2015. "The random walk versus unbiased efficiency: can we separate the wheat from the chaff?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 38(2), pages 251-279, October.
    2. Sibel Cengiz & Afsin Sahin, 2014. "Modelling nonlinear behavior of labor force participation rate by STAR: An application for Turkey," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 7(1), pages 113-127, April.
    3. Boniface Yemba & Yi Duan & Nabaneeta Biswas, 2023. "Government spending news and stock price index," Economics Bulletin, AccessEcon, vol. 43(4), pages 1816-1841.
    4. Dhekra Azouzi & Rohit Vishal Kumar & Chaker Aloui, 2011. "Forward Rate Unbiasedness Hypothesis in the Tunisian Exchange Rate Market," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 1(2), pages 17-44, July.
    5. Baillie, Richard T. & Cho, Dooyeon, 2016. "Assessing Euro crises from a time varying international CAPM approach," Journal of Empirical Finance, Elsevier, vol. 39(PB), pages 197-208.
    6. Garcia-Herrero, Alicia & Xia, Le, 2013. "China's RMB bilateral swap agreements: What explains the choice of countries?," BOFIT Discussion Papers 12/2013, Bank of Finland Institute for Emerging Economies (BOFIT).
    7. Eva Černohlávková & Hana Machková & Ludmila Štěrbová & Dana Zadražilová, 2013. "Zahraniční a vnitřní obchod - historie a rozvoj vědního oboru [Foreign and Domestic Trade - The History and Development of Science Branch]," Politická ekonomie, Prague University of Economics and Business, vol. 2013(4), pages 555-567.
    8. Carmen Gloria Silva, 2010. "Forward premium puzzle and term structure of interest rates: the case of New Zealand," Working Papers Central Bank of Chile 570, Central Bank of Chile.
    9. Xiao, Chang & Florescu, Ionut & Zhou, Jinsheng, 2020. "A comparison of pricing models for mineral rights: Copper mine in China," Resources Policy, Elsevier, vol. 65(C).
    10. Nikolaos Antonakakis & Ioannis Chatziantoniou & David Gabauer, 2021. "The impact of Euro through time: Exchange rate dynamics under different regimes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1375-1408, January.
    11. Goodness C. Aye & Mehmet Balcilar & Adél Bosch & Rangan Gupta & Francois Stofberg, 2013. "The out-of-sample forecasting performance of non-linear models of real exchange rate behaviour: The case of the South African Rand," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(1), pages 121-148, April.
    12. Michele Fratianni, 2004. "Borders and the Constraints on Globalization," Working Papers 2004-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    13. Costantini, Mauro & Cuaresma, Jesus Crespo & Hlouskova, Jaroslava, 2014. "Can Macroeconomists Get Rich Forecasting Exchange Rates?," Economics Series 305, Institute for Advanced Studies.
    14. Ángel de la Fuente, 2013. "Las finanzas autonómicas en boom y en crisis (2003-12)," Hacienda Pública Española / Review of Public Economics, IEF, vol. 205(2), pages 127-150, June.
    15. Angel De la Fuente, 2013. "La financiacion de las comunidades autonomas de regimen comun en 2011," Working Papers 1330, BBVA Bank, Economic Research Department.
    16. He, Kaijian & Chen, Yanhui & Tso, Geoffrey K.F., 2018. "Forecasting exchange rate using Variational Mode Decomposition and entropy theory," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 510(C), pages 15-25.
    17. Raj Aggarwal & Brian M. Lucey & Fergal A. O'Connor, 2014. "Rationality in Precious Metals Forward Markets: Evidence of Behavioural Deviations in the Gold Markets," The Institute for International Integration Studies Discussion Paper Series iiisdp462, IIIS.
    18. Claudio, Morana, 2015. "The US$/€ exchange rate: Structural modeling and forecasting during the recent financial crises," Working Papers 321, University of Milano-Bicocca, Department of Economics, revised 28 Dec 2015.
    19. Rohit Vishal Kumar & Dhekra Azouzi, 2011. "Tunisian and Indian Forex Markets: A Comparision on Forward Rate Unbiased Hypothesis," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 14(40), pages 81-98, June.
    20. Foroni, Claudia & Ravazzolo, Francesco & Rossini, Luca, 2023. "Are low frequency macroeconomic variables important for high frequency electricity prices?," Economic Modelling, Elsevier, vol. 120(C).

    More about this item

    Keywords

    Forward exchange rate; spot exchange rate; rational expectations theory; currency pair; FOREX;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:men:wpaper:52_2015. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Luděk Kouba (email available below). General contact details of provider: https://edirc.repec.org/data/femencz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.