Identifying Exchange Rate Common Factors
Donggyu Sul (),
Nelson Mark () and
No 23726, NBER Working Papers from National Bureau of Economic Research, Inc
Using recently developed model selection procedures, we determine that exchange rate returns are driven by a two-factor model. We identify them as a dollar factor and a euro factor. Exchange rates are thus driven by global, US, and Euro-zone stochastic discount factors. The identified factors can also be given a risk-based interpretation. Identification motivates multilateral models for bilateral exchange rates. Out-of-sample forecast accuracy of empirically identified multilateral models dominate the random walk and a bilateral purchasing power parity fundamentals prediction model. 24-month ahead forecast accuracy of the multilateral model dominates those of a principal components forecasting model.
JEL-codes: F31 F37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed
Published as Ryan Greenaway‐McGrevy & Nelson C. Mark & Donggyu Sul & Jyh‐Lin Wu, 2018. "Identifying Exchange Rate Common Factors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 2193-2218, November.
Downloads: (external link)
Journal Article: IDENTIFYING EXCHANGE RATE COMMON FACTORS (2018)
Working Paper: Identifying Exchange Rate Common Factors (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:23726
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().