Can currency-based risk factors help forecast exchange rates?
This paper examines time-series predictability of bilateral exchange rates from linear factor models that utilize 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 factor mo...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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Elsevier
2015
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| Online Access: | https://eprints.nottingham.ac.uk/36949/ |
| _version_ | 1848795364622073856 |
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| author | Ahmed, Shamim Liu, Xiaoquan Valente, Giorgio |
| author_facet | Ahmed, Shamim Liu, Xiaoquan Valente, Giorgio |
| author_sort | Ahmed, Shamim |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | This paper examines time-series predictability of bilateral exchange rates from linear factor models that utilize 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 factor models largely fail to outperform the benchmark of random walk with drift model in the out-of-sample forecasting of monthly exchange rate returns. This holds true for individual currencies and currency portfolios formed on forward discounts. We also show that the information embedded in the currency-based risk factors does not generate systematic economic value to investors. |
| first_indexed | 2025-11-14T19:30:55Z |
| format | Article |
| id | nottingham-36949 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-14T19:30:55Z |
| publishDate | 2015 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-369492017-10-18T18:14:32Z https://eprints.nottingham.ac.uk/36949/ Can currency-based risk factors help forecast exchange rates? Ahmed, Shamim Liu, Xiaoquan Valente, Giorgio This paper examines time-series predictability of bilateral exchange rates from linear factor models that utilize 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 factor models largely fail to outperform the benchmark of random walk with drift model in the out-of-sample forecasting of monthly exchange rate returns. This holds true for individual currencies and currency portfolios formed on forward discounts. We also show that the information embedded in the currency-based risk factors does not generate systematic economic value to investors. Elsevier 2015-09-21 Article PeerReviewed application/pdf en cc_by_nc_nd https://eprints.nottingham.ac.uk/36949/1/FX%20Forecasting.pdf Ahmed, Shamim, Liu, Xiaoquan and Valente, Giorgio (2015) Can currency-based risk factors help forecast exchange rates? International Journal of Forecasting, 32 (1). pp. 75-97. ISSN 0169-2070 Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models http://www.sciencedirect.com/science/article/pii/S016920701500062X doi:10.1016/j.ijforecast.2015.01.010 doi:10.1016/j.ijforecast.2015.01.010 |
| spellingShingle | Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models Ahmed, Shamim Liu, Xiaoquan Valente, Giorgio Can currency-based risk factors help forecast exchange rates? |
| title | Can currency-based risk factors help forecast exchange rates? |
| title_full | Can currency-based risk factors help forecast exchange rates? |
| title_fullStr | Can currency-based risk factors help forecast exchange rates? |
| title_full_unstemmed | Can currency-based risk factors help forecast exchange rates? |
| title_short | Can currency-based risk factors help forecast exchange rates? |
| title_sort | can currency-based risk factors help forecast exchange rates? |
| topic | Exchange rates; Out-of-sample predictability; Economic value; Time series; Econometric models |
| url | https://eprints.nottingham.ac.uk/36949/ https://eprints.nottingham.ac.uk/36949/ https://eprints.nottingham.ac.uk/36949/ |