Handbook of Exchange Rates

8.8 Appendix A: The Bootstrap Algorithm

This appendix summarizes the bootstrap algorithm we use for generating critical values for the OOS test statistics under the null of no exchange rate predictability against a one-sided alternative of linear predictability. Following Mark (1995) and Kilian (1999), the algorithm consists of the following steps:

1. Define the IS period for and the OOS period for . We generate P = (T − 1) − M OOS forecasts by estimating the predictive regression

and then computing the test statistic of interest, .

2. Define the data generating process (DGP) as

and estimate this model subject to the constraint that β in the first equation is zero, using the full sample of observations . The lag order p in the second equation is determined by a suitable lag order selection ...