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Empirical exchange rate models and currency risk: some evidence from density forecasts

By Lucio Sarno and Giorgio Valente


A large literature in exchange rate economics has investigated the forecasting performance of empirical exchange rate models using conventional point forecast accuracy criteria. However, in the context of managing exchange rate risk, interest centers on more than just point forecasts. This paper provides a formal evaluation of recent exchange rate models based on the term structure of forward exchange rates, which previous research has shown to be satisfactory in point forecasting, in terms of density forecasting performance. The economic value of the exchange rate density forecasts is investigated in the context of an application to a simple risk management exercise

Topics: HG
Publisher: Warwick Business School, Financial Econometrics Research Centre
Year: 2004
OAI identifier: oai:wrap.warwick.ac.uk:1788

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