Forecasting Foreign Exchange Rates

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Znaczko, Timothy M
foreign; exchange; regression; forecast; transfer; function; Business Administration, Management, and Operations; Finance and Financial Management; International Business
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The purpose of this thesis is to seek answers to different questions regarding the forecasting of foreign exchange rates. Exchange rate movement is regularly monitored by central banks for macroeconomic analysis and market surveillance purposes. Results in the literature show exchange rate models perform poorly in out-of-sample prediction analysis, even though some models have good in-sample analysis. The results were found using methods including moving average, exponential smoothing, random walk, and Box-Jenkins transfer function. The questions that I ask are: how accurate are these models when compared to a random prediction of future exchange rates, and what variables, if any, allow for the most accurate prediction?This thesis is to research a variety of foreign exchange forecasting models and gather data for several different countries and variables in order to compare the future predictions to a random walk model. There are several objectives I will pursue to determine if this thesis is valid. One objective is to define the specific formulas used for each model, including which variable each model uses. Another objective is to run tests of all the models, variables, and data, and compare the viability of the results. A number of questions will arise and will be investigated.