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A Meta Model Analysis of Exchange Rate Determination

In: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling

Author

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  • Chrystalleni Aristidou
  • Kevin Lee
  • Kalvinder Shields

Abstract

A novel approach to modeling exchange rates is presented based on a set of models distinguished by the drivers of the rate and regime duration. The models are combined into a “meta model” using model averaging and non-nested hypothesis-testing techniques. The meta model accommodates periods of stability and slowly evolving or abruptly changing regimes involving multiple drivers. Estimated meta models for five exchange rates provide a compelling characterization of their determination over the last 40 years or so, identifying “phases” during which the influences from policy and financial market responses to news succumb to equilibrating macroeconomic pressures and vice versa.

Suggested Citation

  • Chrystalleni Aristidou & Kevin Lee & Kalvinder Shields, 2022. "A Meta Model Analysis of Exchange Rate Determination," Advances in Econometrics, in: Essays in Honor of M. Hashem Pesaran: Prediction and Macro Modeling, volume 43, pages 199-215, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-90532021000043a010
    DOI: 10.1108/S0731-90532021000043A010
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    More about this item

    Keywords

    Exchange rates; structural uncertainty; regime uncertainty; model averaging; structural breaks; non-nested testing; C51; F31; F47;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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