House of Paine

exchange rate models suck

 this is mistah chinn
of madtown U 

read his blog  words ...


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"One of my long term interests
 is in the predictability of exchange rates
 particularly over the longer term 
-- at horizons of quarters if not years

 One recent paper coauthored by myself
, Yin-Wong Cheung 
and Antonio Garcia Pascual examined
 the long horizon
 (1 quarter, 1 year and 5 year) predictability
 of the USD against 
the DM, Yen, Pound, Swiss Franc, and Canadian dollar

 We compared several popular models
 including the Dornbusch and Frankel
 sticky price monetary model
 a model based upon productivity differentials
 interest rate parity (essentially the forward rate)
 and a specification incorporating
 many of these channels -- 
sometimes called BEERs 
(for behavioral equilibrium exchange rate models)

 All of these were compared against
 a random walk characterization 
of the exchange rate. 

We found that,
 using a mean squared error criterion
 there was little evidence 
of outpredicting a random walk"

  if the  predictive models 
    don't hold water kidz 

we're flyin .....blind 

then again

intelligent design 
might look like a random walk 

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