Can currency-based risk factors help forecast exchange rates?
Ahmed, Shamim; Liu, Xiaoquan; Valente, Giorgio
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.
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|
|Peer Reviewed||Peer Reviewed|
|Keywords||Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models|
|Copyright Statement||Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0|
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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