The application of stochastic processes in currency exchange rate forecasting and benchmarking for USD-TL and EURO-TL exchange rates

Abstract

Since the first half of the 1990‘s many developing countries liberalizing their financial systems began to be more integrated to the global financial system. Due to the financial crisis, many developing countries have shifted to floating exchange rate regime. Thus, the significance of exchange rates has increased dramatically for the individual and institutional investors in the financial markets. Therefore, the number of studies which focus on forecasting the currency exchange rates increased dramatically. In this study, USDTL and Euro-TL exchange rate forecasts are generated via fundamental stochastic processes based on random walk or martingale, forward rates and the some time series models. The error performance values of the obtained results are tested via the test method developed by Diebold and Mariano (1995) and West (1996). It can be concluded that stochastic processes outperformed time series models for USD-TL exchange rates. According to the results stochastic process are generating more consistent and significant results.