Evaluating the Predictability of Exchange Rates Using Long-Horizon Regressions: Mind Your p 's and q 's!

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Abstract
Since the breakdown of the Bretton Woods agreement, researchers have used a wide variety of structural models to try to predict exchange rate movements. Unfortunately, finding consistent evidence that these models outperform a random walk has proven elusive. In this paper, we investigate the impact different methods of inference may have had on these conclusions. Using p-values based on recently developed tests of forecast accuracy and encompassing, as well as q-values designed to mitigate multiple testing problems, we provide stronger evidence consistent with these models having superior predictive ability. Our results suggest that previous studies' inability to detect predictive ability may have been influenced by the statistics used and the manner in which they were employed.

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