publication . Article . Preprint . 2006

A new approach to forecasting exchange rates

Kenneth W Clements; Yihui Lan;
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  • Published: 01 Jan 2006 Journal: Journal of International Money and Finance, volume 29, pages 1,424-1,437 (issn: 0261-5606, Copyright policy)
  • Publisher: Elsevier BV
Abstract
Building on purchasing power parity theory, this paper proposes a new approach to forecasting exchange rates using the Big Mac data from The Economist magazine. Our approach is attractive in three aspects. Firstly, it uses easily-available Big Mac prices as input. These prices avoid several serious problems associated with broad price indexes, such as the CPI, that are used in conventional PPP studies. Secondly, this approach provides real-time exchange-rate forecasts at any forecast horizon. Such real-time forecasts can be made on a day-to-day basis if required, so that the forecasts are based on the most up-to-date information set. These high-frequency forecas...
Subjects
arXiv: Physics::Atmospheric and Oceanic Physics
free text keywords: Exchange-rate forecasting, Bic Mac prices, purchasing power parity, Monte Carlo simulation, Economics and Econometrics, Finance, Price index, Economics, Single point, Purchasing power parity, Macroeconomics, Horizon, Monte Carlo method, Consumer price index, Random walk, jel:F30, jel:C53
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publication . Article . Preprint . 2006

A new approach to forecasting exchange rates

Kenneth W Clements; Yihui Lan;