Identifying Exchange Rate Common Factors / Ryan Greenaway-McGrevy, Donggyu Sul, Nelson Mark, Jyh-Lin Wu.

Format:

Book

Author/Creator:

Greenaway-McGrevy, Ryan.

Contributor:

National Bureau of Economic Research.

Sul, Donggyu.

Mark, Nelson.

Wu, Jyh-Lin.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23726.

NBER working paper series no. w23726

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

Using recently developed model selection procedures, we determine that exchange rate returns are driven by a two-factor model. We identify them as a dollar factor and a euro factor. Exchange rates are thus driven by global, US, and Euro-zone stochastic discount factors. The identified factors can also be given a risk-based interpretation. Identification motivates multilateral models for bilateral exchange rates. Out-of-sample forecast accuracy of empirically identified multilateral models dominate the random walk and a bilateral purchasing power parity fundamentals prediction model. 24-month ahead forecast accuracy of the multilateral model dominates those of a principal components forecasting model.

Notes:

Print version record

August 2017.