Can Affine Term Structure Models Help Us Predict Exchange Rates?
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The author proposes an arbitrage-free model of the joint behaviour of interest and exchange rates whose exchange rate forecasts outperform those produced by a random-walk model, a vector autoregression on the forward premiums and the rate of depreciation, and the standard forward premium regression. In addition, the model is able to reproduce the forward premium puzzle.
Journal of Money, Credit, and Banking (0022-2879)
June 2009. Vol. 41, Iss. 4, pp. 755-66