NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Factor Model Forecasts of Exchange Rates

Charles Engel, Nelson C. Mark, Kenneth D. West

NBER Working Paper No. 18382
Issued in September 2012
NBER Program(s):   AP   IFM   ME

We construct factors from a cross section of exchange rates and use the idiosyncratic deviations from the factors to forecast. In a stylized data generating process, we show that such forecasts can be effective even if there is essentially no serial correlation in the univariate exchange rate processes. We apply the technique to a panel of bilateral U.S. dollar rates against 17 OECD countries. We forecast using factors, and using factors combined with any of fundamentals suggested by Taylor rule, monetary and purchasing power parity (PPP) models. For long horizon (8 and 12 quarter) forecasts, we tend to improve on the forecast of a “no change” benchmark in the late (1999-2007) but not early (1987-1998) parts of our sample.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

An online appendix is available for this publication.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18382

Users who downloaded this paper also downloaded these:
Jeanne w18404 Capital Account Policies and the Real Exchange Rate
Engel, Mark, and West w13318 Exchange Rate Models Are Not as Bad as You Think
Ferraro, Rogoff, and Rossi w17998 Can Oil Prices Forecast Exchange Rates?
Molodtsova and Papell w18330 Taylor Rule Exchange Rate Forecasting During the Financial Crisis
Engel w17116 The Real Exchange Rate, Real Interest Rates, and the Risk Premium
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us