Can currency-based risk factors help forecast exchange rates?

Shamim Ahmed, Xiaoquan Liu and Giorgio Valente ()

International Journal of Forecasting, 2016, vol. 32, issue 1, 75-97

Abstract: This paper examines the time series predictability of bilateral exchange rates from linear factor models that utilize the 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 random walk with drift model for the out-of-sample forecasting of monthly exchange rate returns. This holds true for both 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 for investors.

Keywords: Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S016920701500062X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:32:y:2016:i:1:p:75-97

DOI: 10.1016/j.ijforecast.2015.01.010

Access Statistics for this article

International Journal of Forecasting is currently edited by R. J. Hyndman

More articles in International Journal of Forecasting from Elsevier
Bibliographic data for series maintained by Catherine Liu ().