Forecast bias and accuracy of exchange rates in emerging markets

This study assesses the forecast bias and accuracy of the three commonly used forecast methods for 12 different emerging market currencies. We find that each forecast method commonly exhibits a forecast bias. The random walk method outperformed the forward rate and ARIMA methods for some emerging market currencies, and was not outperformed by these alternative methods. In general, it appears that the incorporation of expectation components by the implicit forward and ARIMA methods do not improve the forecast, and actually reduce forecast accuracy in some cases. Furthermore, the Latin American currencies were typically forecast with more error.