We introduce a forecasting method that closely matches the econometric properties required by the theory of exchange rate prediction. Our approach formally models (i) when (and if) predictor variables enter or leave a regression model, (ii) the degree of parameter instability, (iii) the...

This paper considers how an investor in the foreign exchange market can exploit predictive information by means of flexible Bayesian inference. Using a variety of different vector autoregressive models, the investor is able, each period, to revise past predictive mistakes and learn about...