Modelling exchange rates: smooth transitions, neural networks, and linear models

The goal of this paper is to test for and model nonlinearities in several monthly exchange rates time series. We apply two different nonlinear alternatives, namely: the artificial neural network time series model estimated with Bayesian regularization and a flexible smooth transition specifica-tion, called the neuro-coefficient smooth transition autoregression. The linearity test rejects the null hypothesis of linearity in ten out of fourteen series. We compare, using different measures, the fore-casting performance of the nonlinear specifications with the linear autoregression and the random walk models.