Model Uncertainty and Exchange Rate Forecasting

Roy Kouwenberg, Agnieszka Markiewicz, R Verhoeks, Remco Zwinkels

Research output: Contribution to journalArticleAcademicpeer-review

19 Citations (Scopus)


Exchange rate models with uncertain and incomplete information predict that investors focus on a small set of fundamentals that changes frequently over time. We design a model selection rule that captures the current set of fundamentals that best predicts the exchange rate. Out-of-sample tests show that the forecasts made by this rule significantly beat a random walk for 5 out of 10 currencies. Furthermore, the currency forecasts generate meaningful investment profits. We demonstrate that the strong performance of the model selection rule is driven by time-varying weights attached to a small set of fundamentals, in line with theory.
Original languageEnglish
Pages (from-to)341-363
Number of pages23
JournalJournal of Financial and Quantitative Analysis
Issue number1
Publication statusPublished - 2017


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