Can currency-based risk factors help forecast exchange rates?

Ahmed, Shamim and Liu, Xiaoquan and Valente, Giorgio (2015) Can currency-based risk factors help forecast exchange rates? International Journal of Forecasting, 32 (1). pp. 75-97. ISSN 0169-2070

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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.

Item Type: Article
Keywords: Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models
Schools/Departments: University of Nottingham, China > Faculty of Business > Nottingham University Business School China
University of Nottingham, UK > Faculty of Social Sciences > Nottingham University Business School
Identification Number: https://doi.org/10.1016/j.ijforecast.2015.01.010
Depositing User: Fuller, Stella
Date Deposited: 19 Sep 2016 07:56
Last Modified: 05 Nov 2016 15:08
URI: http://eprints.nottingham.ac.uk/id/eprint/36949

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