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Segmented regression modelling with an application to German exchange rate data Susko, Edward Andrew


Segmented regression models are the topic of this thesis. These are regression models in which the mean response is thought to be linear in the explanatory variables within regions of a particular explanatory variable. A criterion for estimating the number of segments in a segmented model is given and the consistency of this estimator is established under rather general conditions. There have been many studies on modeling and forecasting foreign exchange rates using various models, notably the random walk model, the forward rate model, monetary models and vector autoregressions, see, for example, Meese and Rogoff (1983) and Baillie and McMahon (1989). The general conclusions have been that most of the models cannot outperform the random walk model by a significant margin. The observation that the dependence of the exchange rate on the key macroeconomic indicators is time varying, nonstationary and nonlinear leads to consideration of nonlinear models. In this thesis segmented models are fitted to German exchange rate data using least squares and forecasting results obtained from these models are compared with forecasting results from widely used models in exchange rate prediction. The segmented models tend to perform better than models that have been established in the literature, notably, the random walk model.

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