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Predicting exchange rate with commodity prices: The role of structural breaks and asymmetries

Afees Salisu (), Wasiu Adekunle (), Zachariah Emmanuel () and Wasiu Alimi ()
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Wasiu Adekunle: Centre for Econometric and Allied Research, University of Ibadan
Wasiu Alimi: Centre for Econometric and Allied Research, University of Ibadan

No 55, Working Papers from Centre for Econometric and Allied Research, University of Ibadan

Abstract: In this paper, we offer new evidence on the predictability of exchange rate with commodity prices by accounting for the role of asymmetries and structural breaks. In particular, we evaluate whether such considerations matter for the forecast performance of the predictive model for exchange rate. We further account for any possible bias in estimation due to the presence of persistence, endogeneity and conditional heteroscedasticity effects in our predictors. Monthly data of five major tradable currency pairs in the world and disaggregated commodity price indices over the period of 1960 to 2017 are utilized. We find significant improvements in both the in-sample and out-of-sample forecast performance of the predictive model for exchange rate when asymmetries and structural breaks are accommodated. In addition, all the economic models considered with and without asymmetries and structural breaks offer superior forecast performance over the ARFIMA model. Our results are robust to alternative exchange rates and commodity price indices and different breaks, data samples and forecast horizons.

Keywords: Exchange rate; Commodity prices; Forecast evaluation, Asymmetry, Structural break (search for similar items in EconPapers)
JEL-codes: F31 F37 Q02 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-opm
Date: 2018-04
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