Nowcasting of the Short-run Euro-Dollar Exchange Rate with Economic Fundamentals and Time-varying Parameters

Boniface P. Yemba, Olusegun Michael Otunuga, Biyan Tang, Nabaneeta Biswas

Research output: Contribution to journalArticlepeer-review

Abstract

This paper nowcasts the Euro-Dollar short-run exchange rate by using a MF-TVP-FAVAR model. The FAVAR framework improves forecasting accuracy by expanding the information set of the previously widely used VAR models. We adopt a flexible modelling approach that adjusts for structural breaks in the data and money demand instability; it also prevents information loss due to variables being quoted at mixed frequencies. We estimate our model by using a dual conditionality linear Kalman filtering/smoothing. Our results indicate that the specified model outperforms the Random Walk and other structural models at all forecasting horizons.

Original languageEnglish (US)
Article number103571
JournalFinance Research Letters
Volume52
DOIs
StatePublished - Mar 2023

Keywords

  • Divisia monetary aggregates
  • Euro-Dollar
  • Exchange rate nowcasting
  • FAVAR
  • Mixed frequencies

ASJC Scopus subject areas

  • Finance

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