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Forecasting Exchange Rates using Bayesian Threshold Vector Autoregressions

Author

Listed:
  • Florian Huber

    (Vienna University of Economics and BA)

Abstract

In this paper we assess the predictive abilities of a Bayesian threshold vector autoregression (B-TVAR) to forecast the EUR/USD exchange rate. By introducing stochastic search variable selection priors (SSVS), we account for the inherent model uncertainty when it comes to modeling exchange rates. Our results suggest that, by applying Bayesian methods to the TVAR, it is possible to improve upon the random walk forecast. Surprisingly, we even managed to outperform the naive benchmark model in short-term forecasting, where the gains in terms of predictive ability are substantial.

Suggested Citation

  • Florian Huber, 2014. "Forecasting Exchange Rates using Bayesian Threshold Vector Autoregressions," Economics Bulletin, AccessEcon, vol. 34(3), pages 1687-1695.
    • Handle: RePEc:ebl:ecbull:eb-14-00532
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2014/Volume34/EB-14-V34-I3-P154.pdf
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    References listed on IDEAS

    as
    1. Cathy W. S. Chen & Mike K. P. So, 2003. "Subset threshold autoregression," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 22(1), pages 49-66.
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    3. Clements, Michael P & Smith, Jeremy, 1999. "A Monte Carlo Study of the Forecasting Performance of Empirical SETAR Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(2), pages 123-141, March-Apr.
    4. Cathy W. S. Chen & Jack C. Lee, 1995. "Bayesian Inference Of Threshold Autoregressive Models," Journal of Time Series Analysis, Wiley Blackwell, vol. 16(5), pages 483-492, September.
    5. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    6. John Geweke & Nobuhiko Terui, 1993. "Bayesian Threshold Autoregressive Models For Nonlinear Time Series," Journal of Time Series Analysis, Wiley Blackwell, vol. 14(5), pages 441-454, September.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    TVAR; SSVS; Forecasting; Exchange Rates.;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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