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Journal Article

Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability

Nelson C. Mark
The American Economic Review
Vol. 85, No. 1 (Mar., 1995), pp. 201-218
Stable URL: http://www.jstor.org/stable/2118004
Page Count: 18
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Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability
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Abstract

Regressions of multiple-period changes in the log exchange rate on the deviation of the log exchange rate from its "fundamental value," display evidence that long-horizon changes in log nominal exchange rates contain an economically significant predictable component. To account for small-sample bias and size distortion in asymptotic tests, inference is drawn from bootstrap distributions generated under the null hypothesis that the log exchange rate is unpredictable. The bias-adjusted slope coefficients and R2's increase with the forecast horizon, and the out-of-sample point predictions generally outperform the driftless random walk at the longer horizons.

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