Forecasting exchange rates in the presence of instabilities

Many exchange rate papers articulate the view that instabilities constitute a major impediment to exchange rate predictability. In this thesis we implement Bayesian and other techniques to account for such instabilities, and examine some of the main obstacles to exchange rate models' predictive ability. We first consider in Chapter 2 a time-varying parameter model in which fluctuations in exchange rates are related to short-term nominal interest rates ensuing from monetary policy rules, such as Taylor rules. Unlike the existing exchange rate studies, the parameters of our Taylor rules are allowed to change over time, in light of the widespread evidence of shifts in fundamentals - for example in the aftermath of the Global Financial Crisis. Focusing on quarterly data frequency from the crisis, we detect forecast improvements upon a random walk (RW) benchmark for at least half, and for as many as seven out of 10, of the currencies considered. Results are stronger when we allow the time-varying parameters of the Taylor rules to differ between countries. In Chapter 3 we look closely at the role of time-variation in parameters and other sources of uncertainty in hindering exchange rate models' predictive power. We apply a Bayesian setup that incorporates the notion that the relevant set of exchange rate determinants and their corresponding coefficients, change over time. Using statistical and economic measures of performance, we first find that predictive models which allow for sudden, rather than smooth, changes in the coefficients yield significant forecast improvements and economic gains at horizons beyond 1-month. At shorter horizons, however, our methods fail to forecast better than the RW. And we identify uncertainty in coefficients' estimation and uncertainty about the precise degree of coefficients variability to incorporate in the models, as the main factors obstructing predictive ability. Chapter 4 focus on the problem of the time-varying predictive ability of economic fundamentals for exchange rates. It uses bootstrap-based methods to uncover the time-specific conditioning information for predicting fluctuations in exchange rates. Employing several metrics for statistical and economic evaluation of forecasting performance, we find that our approach based on pre-selecting and validating fundamentals across bootstrap replications generates more accurate forecasts than the RW. The approach, known as bumping, robustly reveals parsimonious models with out-of-sample predictive power at 1-month horizon; and outperforms alternative methods, including Bayesian, bagging, and standard forecast combinations. Chapter 5 exploits the predictive content of daily commodity prices for monthly commodity-currency exchange rates. It builds on the idea that the effect of daily commodity price fluctuations on commodity currencies is short-lived, and therefore harder to pin down at low frequencies. Using MIxed DAta Sampling (MIDAS) models, and Bayesian estimation methods to account for time-variation in predictive ability, the chapter demonstrates the usefulness of suitably exploiting such short-lived effects in improving exchange rate forecasts. It further shows that the usual low-frequency predictors, such as money supplies and interest rates differentials, typically receive little support from the data at monthly frequency, whereas MIDAS models featuring daily commodity prices are highly likely. The chapter also introduces the random walk Metropolis-Hastings technique as a new tool to estimate MIDAS regressions.

A deformation model of flexible, high area-to-mass ratio debris under perturbations and validation method

A new type of space debris was recently discovered by Schildknecht in near -geosynchronous orbit (GEO). These objects were later identified as exhibiting properties associated with High Area-to-Mass ratio (HAMR) objects. According to their brightness magnitudes (light curve), high rotation rates and composition properties (albedo, amount of specular and diffuse reflection, colour, etc), it is thought that these objects are multilayer insulation (MLI). Observations have shown that this debris type is very sensitive to environmental disturbances, particularly solar radiation pressure, due to the fact that their shapes are easily deformed leading to changes in the Area-to-Mass ratio (AMR) over time. This thesis proposes a simple effective flexible model of the thin, deformable membrane with two different methods. Firstly, this debris is modelled with Finite Element Analysis (FEA) by using Bernoulli-Euler theory called “Bernoulli model”. The Bernoulli model is constructed with beam elements consisting 2 nodes and each node has six degrees of freedom (DoF). The mass of membrane is distributed in beam elements. Secondly, the debris based on multibody dynamics theory call “Multibody model” is modelled as a series of lump masses, connected through flexible joints, representing the flexibility of the membrane itself. The mass of the membrane, albeit low, is taken into account with lump masses in the joints. The dynamic equations for the masses, including the constraints defined by the connecting rigid rod, are derived using fundamental Newtonian mechanics. The physical properties of both flexible models required by the models (membrane density, reflectivity, composition, etc.), are assumed to be those of multilayer insulation. Both flexible membrane models are then propagated together with classical orbital and attitude equations of motion near GEO region to predict the orbital evolution under the perturbations of solar radiation pressure, Earth’s gravity field, luni-solar gravitational fields and self-shadowing effect. These results are then compared to two rigid body models (cannonball and flat rigid plate). In this investigation, when comparing with a rigid model, the evolutions of orbital elements of the flexible models indicate the difference of inclination and secular eccentricity evolutions, rapid irregular attitude motion and unstable cross-section area due to a deformation over time. Then, the Monte Carlo simulations by varying initial attitude dynamics and deformed angle are investigated and compared with rigid models over 100 days. As the results of the simulations, the different initial conditions provide unique orbital motions, which is significantly different in term of orbital motions of both rigid models. Furthermore, this thesis presents a methodology to determine the material dynamic properties of thin membranes and validates the deformation of the multibody model with real MLI materials. Experiments are performed in a high vacuum chamber (10-4 mbar) replicating space environment. A thin membrane is hinged at one end but free at the other. The free motion experiment, the first experiment, is a free vibration test to determine the damping coefficient and natural frequency of the thin membrane. In this test, the membrane is allowed to fall freely in the chamber with the motion tracked and captured through high velocity video frames. A Kalman filter technique is implemented in the tracking algorithm to reduce noise and increase the tracking accuracy of the oscillating motion. The forced motion experiment, the last test, is performed to determine the deformation characteristics of the object. A high power spotlight (500-2000W) is used to illuminate the MLI and the displacements are measured by means of a high resolution laser sensor. Finite Element Analysis (FEA) and multibody dynamics of the experimental setups are used for the validation of the flexible model by comparing with the experimental results of displacements and natural frequencies.