Identifying Exchange Rate Common Factors

Ryan Greenaway-McGrevy, Donggyu Sul (), Nelson Mark and Jyh-Lin Wu

No 23726, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: F31 F37 (search for similar items in EconPapers)
Date: 2017-08
New Economics Papers: this item is included in nep-for, nep-mon and nep-opm
Note: IFM
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Citations: View citations in EconPapers (9)

Published as Ryan Greenaway‐McGrevy & Nelson C. Mark & Donggyu Sul & Jyh‐Lin Wu, 2018. "Identifying Exchange Rate Common Factors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 2193-2218, November.

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Journal Article: IDENTIFYING EXCHANGE RATE COMMON FACTORS (2018)
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