Forecasting Forex Rate

[Angshuman]

Hi David,
can you provide any guidance how to forecast foreign exchange rates? for example I want to forecast USD/GBP cross currency rate? What kind of distribution does it follow and what is the industry practiced model adopted to forecast the same? Can you please provide an excel sheet for the model you suggest? I think this is a great relevance in current year's FRM exam and also will be of great help to all of us.

 

[David Harper CFA FRM]

Hi Angshuman

FX asset dynamics aren't under exam scope. I frankly am running full tilt on exam support, so i don't have time to build extracirricular models...Plus, this is not an area of expertise for me, frankly. The nearest we get is Hull Ch 18. You often see in regard to FX dynamics the use of lognormal diffussion (e.g., Brownian motion) and Hull Ch 18 mentions that this understatest the extremes (i.e., actual are leptokurtotic). I have seen Brownian motion used, GARCH, and fatter tail (e.g., student's t) conditional distributions...sorry i can't be more help as i do find it interesting (but i just don't have extra time in my 90 hr workweek)...Thanks David

 

[David Harper CFA FRM]

Angshuman - I was catching up on my blog feeds and saw that Econbrowser shared some papers from a couple of FX conferences.
Maybe you'd find interesting @ http://www.econbrowser.com/archives/2009/08/exchange_rates_1.html
David

 

[jasminetichy]

it is impossible to exactly forecast the exchange rate, but you can try to predict it using Forex Calendar.