AbstractExchange rate modelling has been a persistent puzzle for international economists. Forecasts from popular models for the exchange rate generally fail to improve upon the random walk out‐of‐sample. While a multivariate nonparametric approach provides useful information about exchange rates, the model produces forecasts superior to the random walk for only one of the three EMS currencies examined. Using a statistic developed in Mizrach (1991), I find that the forecast improvement, a 4.5 percent reduction in mean squared error for the Lira in daily returns, is not statistically significant. A cross‐validation exercise suggests that the improvement is also not r