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Can currency-based risk factors help forecast exchange rates?

Ahmed, Shamim; Liu, Xiaoquan; Valente, Giorgio

Authors

Shamim Ahmed

Xiaoquan Liu

Giorgio Valente



Abstract

This paper examines time-series predictability of bilateral exchange rates from linear factor models that utilize unconditional and conditional expectations of three currency-based risk factors. Exploiting a comprehensive set of statistical criteria, we find that all versions of the linear factor models largely fail to outperform the benchmark of random walk with drift model in the out-of-sample forecasting of monthly exchange rate returns. This holds true for individual currencies and currency portfolios formed on forward discounts. We also show that the information embedded in the currency-based risk factors does not generate systematic economic value to investors.

Citation

Ahmed, S., Liu, X., & Valente, G. (in press). Can currency-based risk factors help forecast exchange rates?. International Journal of Forecasting, 32(1), https://doi.org/10.1016/j.ijforecast.2015.01.010

Journal Article Type Article
Acceptance Date Aug 1, 2015
Online Publication Date Sep 21, 2015
Deposit Date Sep 19, 2016
Publicly Available Date Sep 19, 2016
Journal International Journal of Forecasting
Print ISSN 0169-2070
Electronic ISSN 0169-2070
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 32
Issue 1
DOI https://doi.org/10.1016/j.ijforecast.2015.01.010
Keywords Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models
Public URL http://eprints.nottingham.ac.uk/id/eprint/36949
Publisher URL http://www.sciencedirect.com/science/article/pii/S016920701500062X
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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