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Exchange Rate Forecasting

Exchange Rate Forecasting. “ No haruspex could look at his fellow without laughing. ” Marcus Porcius Cato (234-149 B.C.). Roman Fortune Tellers. haruspex = look at organs (haru= organs, spex = look at) augur, augury, auspices (look at birds). inauguration, exauguration

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Exchange Rate Forecasting

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  1. Exchange Rate Forecasting “No haruspex could look at his fellow without laughing.” Marcus Porcius Cato (234-149 B.C.)

  2. Roman Fortune Tellers • haruspex = look at organs (haru= organs, spex = look at) • augur, augury, auspices (look at birds). • inauguration, exauguration • Pontifex Maximus (P.M.)

  3. Three puzzles in exchange rate economics:. • 1. The determination puzzle. • 2. The excess volatility puzzle. • 3. The clustering puzzle.

  4. 1.The determination puzzle: Exchange rate movements are virtually unrelated to economic fundamentals (at least over periods of less than two years).

  5. The Dollar/DM Exchange Rate and Relative U.S./German Price Levels, 1964-1997

  6. 2. The excess volatility puzzle: Exchange rates are excessively volatile relative to economic fundamentals.

  7. Month-to-Month Variablility of the Dollar/DM Exchange Rate and of the U.S./German Price level Ratio, 1974-1998

  8. 3. The clustering puzzle: Large swings in exchange ratesare normally followed by large swings in either direction.

  9. I.How to forecast exchange rate with fundamental models. Procedure: • a.Specify exchange rate model • b. Fit the model with historical data. • c. Evaluate the performance of the model with out –of –sample forecast

  10. Pt Mt / L( it , Yt ) Pt* Mt*/ L( it*, Yt* ) I.How to forecast exchange rate with fundamental models.(續) • e.g. Monetary Approach 假設M s、M *s、i、i * 、Y、Y *分別代表本國與外國(後有*號者)之貨幣供給、利率與國民所得。 根據 Monetary Approach Et= = 亦即,Et = f ( Mt s、Mt *s、it、it* 、Yt、Yt*) (+) (-) (+) (-) (-) (+)

  11. I.How to forecast exchange rate with fundamental models.(續) • 假設上式可以下式逼近: ln Et = a + b ( lnMt s– lnMt*s ) + c ( it – it* ) + d ( lnYt– lnYt* ) • Monthly Data: 1 t T Estimate with these data, 假設:迴歸後得到 ^ ^ ^ ^ a = 0.8; b= 0.3; c= 0.2; d= -0.4; R2 = 0.95

  12. I.How to forecast exchange rate with fundamental models.(續) 將以上參數代入 (1)式可得下式(2)式 lnEt = 0.8 + 0.3 ( lnMts– lnMt*s) + 0.2 ( it – it* ) – 0.4(lnYt– lnYt * )

  13. I.How to forecast exchange rate with fundamental models.(續) • Evaluate 將t+1 的M s、M *s、i、i * 、Y、Y *代入(2)式 可得 ^ Et+1(forecasted exchange rate of t+1 ) 同理, 將t+2 的M s、M *s、i、i *、Y、Y *代入(2)式 可得^ Et+2(forecasted exchange rate of t+2 ) 餘類推

  14. I.How to forecast exchange rate with fundamental models.(續) 評估標準: 計算均方差(Mean Squared Errors, MSE) MSE = ∑ n 1 ^ (Et+1- Et+1) 2 n i = 1 Actual Exchange Rate Forecasted Exchange Rate

  15. I.How to forecast exchange rate with fundamental models.(續)問題: • 自變數(Ms、M * s 、i)未知. 必須先預測這些自變數,再以預測得來之自變數來預測匯率 • 結構轉變.函數型態與參數可能發生變化(人的行為改變). • 中央銀行干預外匯市場. • 人的情緒: a. Exchange rates are excessively volatile relative to economic fundamentals. b. Large swings in exchange ratesare usually followed by large swings in either direction.

  16. Et+1- Et Et tFt+1- Et Et Forecast future spot rate using forward exchange rate: e tF t+1= Et+1 → = e Forward Premium of Discount Expected Rate of Depreciation

  17. Forecast future spot rate by current spot rate • Random Walk(隨機漫步. Exchange rates do not have memory!): Et+1= E t + et+1. et+1 are identical, and independent distributions with mean = 0 (i.i.d.). Therefore, the best forecast of future spot rate is simply current spot rate, i.e.Et+1e= E t Comment on non-linear exchange rate models: random walk is very, very difficult to beat.

  18. Practices • Exchange-Rate Forecasting (1) • Model Success and Failure 在一效率市場,現在的即期匯率已經反應所有的公開資訊,現在的即期匯率是未來的匯率的最佳估計式,亦即一般匯率模型(exchange rate models)對匯率的預測不會優於現在的即期匯率,換言之,根據匯率模型的預測而從事外匯交易並無法得到超額利潤。

  19. Practices(續) • Exchange-Rate Forecasting (2) • Predictions During the Estimation Period vs. Predictions Outside the Estimation Period. Richard Meese and Kenneth Rogoff (“Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?”Journal of International Economics, 1983), Frankel, et al. 1996, Bergin 2001

  20. Practices(續) • Predictions During the Estimation Period vs. Predictions Outside the Estimation Period(續) Meese and Rogoff比較一些根據經濟理論而推導出來的匯率模型與隨機漫步模型(亦即未來的匯率等於現在的即期匯率)的預測表現,他們發現: 根據經濟理論而推導出來的匯率模型在樣本內的預測表現相當好,但是這些模型即使使用實際已經發生的自變數數據,它們在樣本外的預測表現比隨機漫步模型還差(更不用說在從事預測時這些自變數數據根本是未知的)。

  21. Practices(續) • Exchange-Rate Forecasting (3) • Who’s the better predictor? Current Spot Rate優於 Forward Rate 優於 Professionals!

  22. Practices(續) • Exchange-Rate Forecasting (4) • Gregory P Hopper, “What determines the exchange rate: Economic factors or market sentiment?”Economic Review, Federal Reserve Bank of Philadelphia, 1997. Economic models and indeed fundamental economic quantities are not very useful in explaining the history of the exchange rate or in forecasting its value over the next year or so. This fact has important implications for market participants.

  23. Practices(續) • The Record of Forecasting Services Econometric-Oriented Services vs. Subjective-Evaluation Services vs. Technically Oriented Services

  24. Practices(續) • The Record of Forecasting Services (1) • Stephen Goodman (“No Better than the Toss of a Coin”, Euromoney, 1978)及後續研究 Stephen Goodman評估以Econometric Techniques (計量分析: 利用計量經濟的技巧估計匯率與利率、通貨膨脹率差額及其它經濟變數之間的關係,並據此從事預測)、Subjective Evaluations與Technical Analysis(技術分析)這三種方法從事匯率預測的實際表現。

  25. Practices(續) • The Record of Forecasting Services (1) Stephen Goodman評估結果: • Econometric forecasters (使用計量分析從事預測) 的表現比單純買進貨幣進而持有的表現還要來得差。 • 技術分析的表現優於計量分析(Must be interpreted with great precaution.)

  26. Practices(續) • The Record of Forecasting Services(2) • Richard Levich(“Analyzing the Accuracy of Foreign Exchange Advisory Services: Theory and Evidence”, 1980) 短期而言,subjective和technical forecasts比econometric forecasts表現得好; 但長期而言,恰好相反。

  27. Practices(續) • The Record of Forecasting Services(3) • Easton, Stephen A and Lalor, Paul A. “The accuracy and timeliness of survey forecasts of six-month and twelve-month”, Applied Financial Economics, 1995. (1). The experts' forecasts, both individually and collectively, failed to predict the direction of movement in exchange rates as accurately as did the simple forecast implicit in the forward rate margin. 

  28. Practices(續) • The Record of Forecasting Services(3) (2). Collectively, the experts' forecasts were also less accurate in predicting the magnitude of exchange rates than were predictions provided by either naive spot rate or forward rate forecasting models.  (3). Individually, of 14 institutions which contributed forecasts to 15 or more surveys, only one provided forecasts which outperformed a simple no-change model.

  29. V. 結論: It is simply futile to forecast exchange rates. Save your energy and hedge your exchange rate exposure.

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