This paper proposes a simple chartist-fundamentalist model in which we allow for nonlinear time variation in chartists’ extrapolation rate. Estimation of the model using monthly data for the major currencies vis-a-vis the US dollar shows that the model is significant in-sample and that it has out-of-sample predictive power for some of the currencies. We investigate the power of tests used in the literature to detect predictability against the alternative of the proposed model. We find that the short-term unpredictability and the long-term predictability are consistent with the model. The short-term unpredictability might be caused by the presence of weak nonlinearities that are difficult to detect at available sample sizes.
Author: Sebastiano Manzan
Sebastiano Manzan, PhD, is an Associate Professor of Economics in the Bert W. Wasserman Department of Economics and Finance at the Zicklin School of Business. He has been on leave from the School over the past two years to serve as lead scientist on the “Big data to forecast economic developments” project at the Joint Research Centre of the European Commission.
His research interests are primarily focused on macroeconomic forecasting, financial econometrics, and using big data in economic applications.
Dr. Manzan’s work has been published in leading journals, including the Journal of Business and Economic Statistics; Journal of Money, Credit and Banking; Journal of Economic Dynamics and Control; International Journal of Forecasting; and Econometric Reviews.