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# Compose a 2000 words essay on Models for Forecasting Exchange Rates. Needs to be plagiarism free!Download file "Models for Forecasting Exchange Rates" to see previous pages... is a function of sample

Compose a 2000 words essay on Models for Forecasting Exchange Rates. Needs to be plagiarism free!

is a function of sample size = N M = N/log N

Schwartz criterion Consistent estimate of lag length

Akaike lag length Minimum mean square prediction errors

criterion of the dependent variable

Similar to AR Weight (W) is assigned arbitrarily W = 0.

95

Random Walk model Current spot rate is a predictor of

the future spot rate.

Basic model Requires no estimation

With a drift parameter Mean monthly (logarithmic)

exchange rate change

These methods minimize criteria based on squared deviations. but it will be ineffective when the fluctuations in foreign exchange rates is unusual - and not as based on reasons established in various studies of fluctuations.

Multivariate Time Series Models - Unconstrained Vector Auto regression (VAR).(1. MEESE, Richard A.. ROGOFF. Kenneth)

Under VAR model, "contemporaneous value of each variable is regressed against lagged values of itself and all the other variables. The exchange rate equation is

st = a i i s - 1 + a l z s t - 2 +"" a i n s f - n + BilXt - 1+ 2 X t - 2 +"" B'iX,- + ui

where X,_j is a vector of the explanatory variables in the earlier equation, lagged jperiods." (1. MEESE, Richard A.. ROGOFF. Kenneth)

VAR yields better forecasts since it does not restrict any variables and is better equipped to tackle the estimation problems that plague the structural models.

Theoretical Models - Purchasing Power Parity Condition (PPP) , Sticky price monetary model of Dornbusch and Frankel , Balassa- Samuelson model based on productivity differentials, uncovered interest rate parity (UIP) (2. Cheung, Yin-Wong . Chinn, Menzie D. . Pascaul, Antonio Garcia)

Model Assumption / Determination