Abstract
<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;" lang="EN-CA"><span style="font-family: Times New Roman;">Given the large body of research addressing exchange rate predictability, the inability of the non-linear model by Diebold and Nason (Journal of International Economics 1990; 28: 315-332) to forecast better than a random walk is puzzling. This paper examines the forecasting performance of Diebold and Nason&rsquo;s non-parametric model for six major spot Canadian dollar exchange rates for the period 1987-2004. The findings suggest that a more flexible non-parametric estimation technique (artificial neural networks) is required and draw into question the choice of lagged dependent variables as explanatory factors. This paper also proposes a pure microstructure exchange rate model as an alternative to non-linear autoregressive models. Such a model sheds new light on the current evidence on linear/non-linear exchange rate predictability based on market microstructure variables.</span></span></p>
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