Exchange Rate Predictability and Financial Conditions

Sebastian Fossati and Xiao Li
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Xiao Li: University of Alberta

No 2025-06, Working Papers from University of Alberta, Department of Economics

Abstract: We model the conditional distribution of future exchange rate returns for nine currencies as a function of real-time financial conditions. We show that the lower and upper quantiles of the exchange rate return distribution exhibit significant in-sample co-movement with financial conditions. Similarly, the conditional moments of the out-of-sample forecast display time-varying patterns, with the variance and kurtosis showing the most pronounced changes during and after the 2008-09 financial crisis. Deteriorating financial conditions are associated with an increase in volatility, particularly for commodity currencies. Overall, we conclude that financial conditions capture tail dependencies in exchange rate returns and contain valuable information for out-of-sample prediction.

Keywords: exchange rates; financial conditions; NFCI; density forecasts (search for similar items in EconPapers)
JEL-codes: C22 F31 G17 (search for similar items in EconPapers)
Pages: 55
Date: 2025-09
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:021546

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