Can currency-based risk factors help forecast exchange rates?

• Published in: International journal of forecasting Vol. 32; no. 1; pp. 75 - 97
• Main Authors: Ahmed, Shamim, Liu, Xiaoquan, Valente, Giorgio
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.01.2016; Elsevier Sequoia S.A
• Subjects: Currency; Econometric models; Economic forecasting; Economic value; Exchange rates; Foreign exchange rates; Out-of-sample predictability; Random walk theory; Rational expectations; Risk factors; Studies; Time series; Exchange rates; Econometric models; Economic value; Time series; Out-of-sample predictability

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 f...