Forecasting Nominal Exchange Rates Using a Dynamic Model Averaging Framework

This paper presents a dynamic model averaging approach for forecasting nominal exchange rates, which is a novel approach in exchange rate forecasting literature. This framework encompasses most of the approaches commonly used in the forecasting literature. We focus on nine major trading currency pairs: AUD/USD, CAD/USD, CHF/USD, EUR/USD, GBP/USD, NOK/USD, NZD/USD, SEK/USD, and JPY/USD, where we use data for approximately the last two decades. We empirically show statistically and economically significant exchange rate predictability in the medium and long run, and we also present some findings on predictability even in the short run. We offer several theoretical explanations for these results on predictability