Currency Forecasting with Markov Switching Models
Charles Mouoyebe
Broschiertes Buch

Currency Forecasting with Markov Switching Models

Exploring the Joint Behavior of the Term Structure of Forward Exchange Rate Premia and the Term Structure of Interest Rates

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Clarida and Taylor (1993) and Clarida et al. (2001) offer a new alternative for nominal spot exchange-rate forecasting. They show that they can improve on forecasting the spot exchange rate over the random walk by using the combination of the full term structure of forward premia and a non-linear model. This study proposes an extension of the Clarida and Taylor framework by developing a Markov switching model where the dynamics of the spot and forward exchange rate is tied to the term structure of interest rates. We motivate theoretically how an endogenous Markov switching model will emerge fr...