Comparative Study of Exchange Rate Theories Ability in Forecasting Exchange Rate Behavior in Foreign Exchange Market
Subject Areas : Financial Knowledge of Securities Analysis
Keywords: exchange rate, Intrest rate, Industrial production index, Purchasing Power Parity theory, Monetary model with flexible p, Asset market model, Mondell-Flemming theort,
Abstract :
Understanding the identity of phenomenon and their relation is one of the function of science. the insight of this knowledge can help scientists to predict the future and make the background of changes and decisions. In addition to understanding of phenomenon relationship some other studies try to compare the theories and find the best one on the point of their predictability. In this study we tried to review different paradigm and thoughts and theories of exchange rate and its behavior and also to compare their ability in forecasting the behavior of exchange rate , for this reason we postulate four theories of exchange rate which are: mondell-flemming theory, purchasing power parity thory,asset market theory and monetary with flexible price. Our time framework include "in the sample" and "out of sample" data and our case study in this research is examining the behavior of GBP/USD in foreign exchange market(FOREX),in the sample data include 01/01/1988 to 01/06/2008 monthly and out of sample data include 01/01/2006 to 01/06/2008. In this research we postulated the theories with in the sample data and after examining the validity of model with macro econometric techniques, then with extracting the four measures RMSE,MAPE,MAE and THEIL INEQUALITY COEFFICIENT we evaluated the ability of forecasting each model based on its theory.Finally the result of the study showed that in the mentioned time framework mondell-flemming model could forecast the behavior of GBP/USD better than other theories.