Foreign exchange rates: A multiple currency and maturity analysis

Abstract Three dollar exchange-rate series — the German mark, the British pound, and the Japanese yen — are converted to market price revisions by calculating the difference between the price for delivery at a fixed date and the preceding period's price for delivery at the same date. These price revisions are likely to meet the stationary stochastic process assumptions required for time-series modeling even if the original series are non-stationary. Using error covariance assumptions analogous to a pooled time series of cross-sections, a multivariate time-series model is fitted and tested on 168 observations out of sample. Forecasting performance is evaluated using both mean squared errors and a non-parametric test of direction.