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Can oil prices forecast exchange rates? An empirical analysis of the relationship between commodity prices and exchange rates

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  • Ferraro, Domenico
  • Rogoff, Kenneth
  • Rossi, Barbara

Abstract

We show the existence of a very short-term relationship at the daily frequency between changes in the price of a country's major commodity export and changes in its nominal exchange rate. The relationship appears to be robust and to hold when we use contemporaneous (realized) commodity price changes in our regression. However, when we use lagged commodity price changes, the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.

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  • Ferraro, Domenico & Rogoff, Kenneth & Rossi, Barbara, 2015. "Can oil prices forecast exchange rates? An empirical analysis of the relationship between commodity prices and exchange rates," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 116-141.
    • Handle: RePEc:eee:jimfin:v:54:y:2015:i:c:p:116-141
    DOI: 10.1016/j.jimonfin.2015.03.001
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    More about this item

    Keywords

    Exchange rates; Predictive ability; Out-of-sample fit;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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