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Forecasting exchange rate volatility: An amalgamation approach

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  • Alexandridis, Antonios K.
  • Panopoulou, Ekaterini
  • Souropanis, Ioannis

Abstract

The importance of exchange rate volatility forecasting has both practical and academic merit. Our aim is to provide a comprehensive analysis of the forecasting ability of financial and macroeconomics variables for future exchange rate volatility. We employ seven widely traded currencies against the US dollar and examine linear models and a variety of machine learning, dimensionality reduction and forecast combination approaches, along with creating a grand forecast (amalgamation approach) from these approaches. Our findings highlight the predictive power of the amalgamation approach, as well as the positive contribution of macroeconomic and financial variables in the forecasting experiment. Furthermore, we generate forecasts on the separate frequencies of volatility using wavelet analysis, in order to extract frequency-related information and examine timing effects in the performance of the methods.

Suggested Citation

  • Alexandridis, Antonios K. & Panopoulou, Ekaterini & Souropanis, Ioannis, 2024. "Forecasting exchange rate volatility: An amalgamation approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 97(C).
  • Handle: RePEc:eee:intfin:v:97:y:2024:i:c:s1042443124001331
    DOI: 10.1016/j.intfin.2024.102067
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    More about this item

    Keywords

    Exchange rates; Volatility forecasting; Forecast combination; Machine learning; Dimensionality reduction; Wavelet decomposition;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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