Modelling the Rand-Dollar Future Spot Rates: The Kalman Filter Approach

This paper provides an estimation of the relationship between the forward exchange rate and the future spot rate under the hypothesis of adaptive parameter updating. The Kalman filter technique is used for this end. The better performance of the Kalman filter technique over the random walk and the ordinary least square (OLS) techniques in out-of-sample forecasts confirms that a recursive technique with time-varying coefficients is relevant for forecasting the rand-dollar future spot rates