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Modeling and Predictability of Exchange Rate Changes by the Extended Relative Nelson–Siegel Class of Models

Graduate School of Economics, Nagoya University, Furo-cho, Chikusa-ku, Nagoya, Aichi 464-8601, Japan
Int. J. Financial Stud. 2018, 6(3), 68; https://doi.org/10.3390/ijfs6030068
Received: 27 June 2018 / Revised: 24 July 2018 / Accepted: 25 July 2018 / Published: 1 August 2018
This paper investigates the predictability of exchange rate changes by extracting the factors from the three-, four-, and five-factor model of the relative Nelson–Siegel class. Our empirical analysis shows that the relative spread factors are important for predicting future exchange rate changes, and our extended model improves the model fitting statistically. The regression model based on the three-factor relative Nelson–Siegel model is the superior model of the extended models for three-month-ahead out-of-sample predictions, and the prediction accuracy is statistically significant from the perspective of the Clark and West statistic. For 6- and 12-month-ahead predictions, although the five-factor model is superior to the other models, the prediction accuracy is not statistically significant. View Full-Text
Keywords: predictability; exchange rate; uncovered interest rate parity; yield curve model predictability; exchange rate; uncovered interest rate parity; yield curve model
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Ishii, H. Modeling and Predictability of Exchange Rate Changes by the Extended Relative Nelson–Siegel Class of Models. Int. J. Financial Stud. 2018, 6, 68.

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