Can the Markov Switching Model Forecast Exchange Rates? [report]

Charles Engel
1992 unpublished
A Markov-switching model is lit for I8 exchange rates at quarterly frequencies. The model fits well in-sample for many exchange rates. By the mean-squared-error criterion, the Markov model does not generate superior forecasts to a random walk or the forward rate. There appears to be some evidence that the forecasts of the Markov model are superior at predicting the direction of change of the exchange rate.
doi:10.3386/w4210 fatcat:ju7y4ib77fbtzc3a2ywhmc2lvy