Dornbusch and the Bitcoin: Forecasting the Bitcoin/US Dollar exchange rate using the overshooting model

The purpose of this paper is to modify the Dornbusch model to make it a suitable tool for analyzing the behavior of the Bitcoin and to attempt to outperform a random walk model in forecasting the Bitcoin/US Dollar exchange rate on the basis of the Root Mean Squared Error and the Theil Inequality Coefficient. It is found that the Dornbusch model in itself is unable to outperform the random walk model in forecasting the Bitcoin/US Dollar exchange rate on the basis of the Root Mean Squared Error and the Theil Inequality Coefficient. However, when the Dornbusch model and the random walk model are combined, the best forecasting performance is obtained. Thus, the Dornbusch model does contain meaningful information which helps to improve the random walk model's forecasting performance