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Can Affine Term Structure Models Help Us Predict Exchange Rates?

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Author Info
Antonio Diez de los Rios

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Abstract

The author proposes an arbitrage-free model of the joint behaviour of interest and exchange rates whose exchange rate forecasts outperform those produced by a random-walk model, a vector autoregression on the forward premiums and the rate of depreciation, and the standard forward premium regression. In addition, the model is able to reproduce the forward premium puzzle.

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File URL: http://www.bankofcanada.ca/en/res/wp/2006/wp06-27.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 06-27.

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Length: 50 pages
Date of creation: 2006
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Handle: RePEc:bca:bocawp:06-27

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Related research
Keywords: Exchange rates; Interest rates; Econometric and statistical methods;

Other versions of this item:

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James R. Lothian & Liuren Wu, 2003. "Uncovered Interest Rate Parity Over the Past Two Centuries," International Finance 0311009, EconWPA. [Downloadable!]
  2. van Amano, Robert A & Norden, Simon, 1998. "Exchange Rates and Oil Prices," Review of International Economics, Blackwell Publishing, vol. 6(4), pages 683-94, November.
    Other versions:
  3. Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Clarida, Richard H. & Sarno, Lucio & Taylor, Mark P. & Valente, Giorgio, 2003. "The out-of-sample success of term structure models as exchange rate predictors: a step beyond," Journal of International Economics, Elsevier, vol. 60(1), pages 61-83, May. [Downloadable!] (restricted)
    Other versions:
  5. Hans Dewachter & Konstantijn Maes, 2001. "An Admissible Affine Model for Joint Term Structure Dynamics of Interest Rates," International Economics Working Papers Series wpie001, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics. [Downloadable!]
  6. Jeannine Bailliu & Michael R. King, 2005. "What Drives Movements in Exchange Rates?," Bank of Canada Review, Bank of Canada, vol. 2005(Autumn), pages 27-39. [Downloadable!]
  7. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02. [Downloadable!] (restricted)
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  9. David K. Backus, 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, American Finance Association, vol. 56(1), pages 279-304, 02. [Downloadable!] (restricted)
  10. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May. [Downloadable!] (restricted)
    Other versions:
  11. Ahn, Dong-Hyun, 2004. "Common Factors and Local Factors: Implications for Term Structures and Exchange Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(01), pages 69-102, March. [Downloadable!]
  12. Geert Bekaert, 2001. "Expectations Hypotheses Tests," Journal of Finance, American Finance Association, vol. 56(4), pages 1357-1394, 08. [Downloadable!] (restricted)
    Other versions:
  13. Michael Brennan & Yihong Xia, 2004. "International Capital Markets and Foreign Exchange Risk," University of California at Los Angeles, Anderson Graduate School of Management 1251, Anderson Graduate School of Management, UCLA. [Downloadable!]
  14. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May. [Downloadable!] (restricted)
  15. Bergstrom, A.R., 1984. "Continuous time stochastic models and issues of aggregation over time," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 20, pages 1145-1212 Elsevier. [Downloadable!] (restricted)
  16. Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(1), pages 243-288, March.
  17. Peng Cheng & Olivier Scaillet, 2002. "Linear-Quadratic Jump-Diffusion Modeling with Application to Stochastic Volatility," FAME Research Paper Series rp67, International Center for Financial Asset Management and Engineering. [Downloadable!]
    Other versions:
  18. Richard H. Clarida & Mark P. Taylor, 1997. "The Term Structure Of Forward Exchange Premiums And The Forecastability Of Spot Exchange Rates: Correcting The Errors," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 353-361, August. [Downloadable!] (restricted)
  19. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June. [Downloadable!] (restricted)
    Other versions:
  20. Jefferson Duarte, 2004. "Evaluating an Alternative Risk Preference in Affine Term Structure Models," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(2), pages 379-404. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Diez de los Rios, Antonio & Sentana, Enrique, 2007. "Testing Uncovered Interest Parity: A Continuous-Time Approach," CEPR Discussion Papers 6516, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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