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

Institute for Monetary and Financial Research, Hong Kong, Exchange Rates as Exchange Rate Common Factors (August 30, 2012). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 21/2012, Available at SSRN: https://ssrn.com/abstract=2138713 or http://dx.doi.org/10.2139/ssrn.2138713

Hong Kong Institute for Monetary and Financial Research (Contact Author)

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