NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Ryan Greenaway-McGrevy

Department of Economics
University of Auckland

E-Mail: r.mcgrevy@auckland.ac.nz
Institutional Affiliation: Bureau of Economic Analysis

NBER Working Papers and Publications

August 2017Identifying Exchange Rate Common Factors
with Donggyu Sul, Nelson Mark, Jyh-Lin Wu: w23726
Using recently developed model selection procedures, we determine that exchange rate returns are driven by a two-factor model. We identify them as a dollar factor and a euro factor. Exchange rates are thus driven by global, US, and Euro-zone stochastic discount factors. The identified factors can also be given a risk-based interpretation. Identification motivates multilateral models for bilateral exchange rates. Out-of-sample forecast accuracy of empirically identified multilateral models dominate the random walk and a bilateral purchasing power parity fundamentals prediction model. 24-month ahead forecast accuracy of the multilateral model dominates those of a principal components forecasting model.

Published: Ryan Greenaway‐McGrevy & Nelson C. Mark & Donggyu Sul & Jyh‐Lin Wu, 2018. "Identifying Exchange Rate Common Factors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(4), pages 2193-2218, November. citation courtesy of

 
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