Exchange Rates as Exchange Rate Common Factors
29 Pages Posted: 31 Aug 2012 Last revised: 26 Jul 2022
Date Written: August 30, 2012
Abstract
This working paper was written by Ryan Greenaway-McGrevy (Bureau of Economic Analysis), Nelson C. Mark (University of Notre Dame and National Bureau of Economic Research), Donggyu Sul (University of Texas at Dallas) and Jyh-Lin Wu (National Sun Yat Sen University).
Factor analysis performed on a panel of 23 nominal exchange rates from January 1999 to December 2010 yields three common factors. This paper identifies the euro/dollar, Swiss-franc/dollar and yen/dollar exchange rates as empirical counterparts to these common factors. These empirical factors explain a large proportion of exchange rate variation over time and have significant in-sample and out-of-sample predictive power.
Keywords: exchange rates, common factors, forecasting
JEL Classification: F31, F37
Suggested Citation: Suggested Citation