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

Lucio Sarno, Pasquale Della Corte and Giulia Sestieri

No 8045, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 US 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.

Keywords: Foreign exchange; Fundamentals; Global imbalances; Predictability (search for similar items in EconPapers)
JEL-codes: F31 F37 G15 (search for similar items in EconPapers)
Date: 2010-10
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Citations: View citations in EconPapers (9)

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