The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth?

Pasquale Della Corte, Lucio Sarno and Giulia Sestieri
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Pasquale Della Corte: Imperial College Business School

The Review of Economics and Statistics, 2012, vol. 94, issue 1, 100-115

Abstract: This paper examines the exchange rate predictability stemming from the equilibrium model of international financial adjustment developed by Gourinchas and Rey (2007). Using predictive variables that measure cyclical external imbalances for country pairs, we assess the ability of this model to forecast out-of-sample four major U.S. dollar exchange rates using various economic criteria of model evaluation. The analysis shows that the model provides economic value to a risk-averse investor, delivering substantial utility gains when switching from a portfolio strategy based on the random walk benchmark to one that conditions on cyclical external imbalances. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2012
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Working Paper: The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth? (2011)
Working Paper: The Predictive Information Content of External Imbalances for Exchange Rate Returns: How Much Is It Worth? (2010)
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